Compute the amount of profit ignoring exchange rate fees

Reference no: EM1332535

Process of Investment Bonds, Municipal Bonds, CDs, etc,

The firm has $150,000 to invest in the spot, forward, or options markets. The spot rate is $1.2622 to the euro, and in 12 months, the forward rate is $1.2905 to the euro. However, this leader is sure that the exchange rate in 12 months will be $1.33 to the euro. Explain how she can speculate on the belief that the euro will be $1.33 in 12 months. Calculate the amount of profit (ignoring exchange rate fees) that will be earned and the percentage return achieved.

2. I have already calculated the numbers for purchasing the Euros at a spot rate detailed here:

The simply method of taking advantage of the belief that the exchange rate will be $1.33 per euro next year is as follws:

Purchase euros at the spot rate $150,000/1.2622 = ?118,840.12 euros

And then hold for 1 year

Then convert the euros back to dollars at $1.33 X 118,840.12 =$158,057.35

Profit is $158,057.35 - $150,000 = $8,057.35

Return on investment is ($8,057.35/$150,000) X 100 = 5.37%

3. Now, the instructor has made a comment that there may be other investments in bonds, municipal bonds, CDs, etc that offer much lower risk that can pay equal or a higher return.

4. This is where I need assistance. Please explain the process of Investment Bonds, Municipal Bonds, CDs, etc,

5. Explain which might be a better choice (other than my spot option in number 2) based on our scenario.

6. Please cite all references used.

Reference no: EM1332535

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