Question

"Clayton Moore is the manager of an international money market fund managed out of London. Unlike many money funds that guarantee their investors a near​ risk-free investment with variable interest​ earnings, Clayton​ Moore's fund is a very aggressive fund that searches out relatively​ high-interest earnings around the​ globe, but at some risk. The fund is​ pound-denominated. Clayton is currently evaluating a rather interesting opportunity in Malaysia. Since the Asian Crisis of​ 1997, the Malaysian government enforced a number of currency and capital restrictions to protect and preserve the value of the Malaysian ringgit. The ringgit was fixed to the U.S. dollar at RM3.80​/$ for seven years. In​ 2005, the Malaysian government allowed the currency to float against several major currencies. The current spot rate today is RM 3.13482 divided by $. Local currency time deposits of​ 180-day maturities are earning 8.895​% per annum. The London eurocurrency market for pounds is yielding 4.196​% per annum on similar​ 180-day maturities. The current spot rate on the British pound is $ 1.5823 divided by pound​, and the​ 180-day forward rate is $ 1.5563 divided by pound. The initial investment is pound1 comma 125 comma 000.00."

This is the problem I have a question about. The correct answer for investment proceeds from the initial investment is £1,194,693.44 but I am getting £1,195,179.55.

What am I doing wrong?

Answer 1

There may be a little rounding off difference

Initial Investment
1,125,000	A
Spot
1.5823	B
$ Value
1780087.5	C = A X B
Spot
3.13482	D
Malaysian Ringitt
5,580,253.90	E = C X D
Deposit rate
8.8950%	F
Ringitt Proceeds
5,828,435.69	G = E X (1+F/2)
Expected Spot
3.13482	H
$ Value
1859256.892	I = G / H
Fwd Rate
1.5563	J
Initital Investment
1194693.44	I / J