Question

3- X, an American citizen and resident is buying a home in Germany for investment purposes for 1,000,000 euro and this is expected to close 3 months from now. A-How many US dollars does she need today to buy the home? B-Formulate a plan to ensure that this amount of US dollars he needs today-(calculated above by you in A)-will be enough to but the home in Germany in euros, 3 months from now. Be specific.

Answer 1

A

To buy a home in Germany would require X to convert Dollars to Euro.

Using the current spot rate, that is, $1.22 per euro (as on 23rd April 2018), X can convert dollars to euros

Total dollar amount required today to buy the home would be $1.12/euro / 1,000,000 euros

That is, 819,672.13 euros

B. X may enter into a future contract with a respective counterparty to exchange dollar for euros at rate fixed today, so that after 3 months, X has 1,000,000 euros. In such a way, X's position due to currency risk is hedged

Another way could be that X could exhange dollars for euros today and invest in Germany at the risk free rate, such that depreciation of euros may be compensated by the return on investment.