Suppose that you are the treasurer of ibm with an extra us$1,000,000 to invest for six months. you are considering the purchase of u. s. t-bills that yield 1.810% (that's a six month rate, not an annual rate by the way) and have a maturity of 26 weeks. the spot exchange rate is $1.00 = ¥100, and the six month forward rate is $1.00 = ¥110. the interest rate in japan (on an investment of comparable risk) is 13 percent. what is your strategy?
take $1m, invest in u. s. t-bills.
take $1m, translate into yen at the spot, invest in japan, and repatriate your yen earnings back into dollars at the spot rate prevailing in six months.
take $1m, translate into yen at the spot, invest in japan, hedge with a short position in the forward contract.
take $1m, translate into yen at the forward rate, invest in japan, hedge with a short position in the spot contract.
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Suppose that you are the treasurer of ibm with an extra us$1,000,000 to invest for six months. you a...
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