Question

If 10-year U.S. Treasury notes yield 5% and German 10-year bunds yield only 1%, you as the CFO of a U. S. company  propose to borrow lots of euros at 2.50%, sell the euros for dollars, earn 5% for six months and hedge your currency risk with a forward contract.  That, you argue, will substantially increase profits.  Should your boss approve this proposal? Why or why not?

Answer 1

Yes my boss should approve this proposal because we can make profit of (5% - 2.5%)/2 in 6 month which is equal to 1.25% and we also hedge our currency risk using the derivative forward contract in that way we are ensure our return with any fluctuation in exchange rate. That's why we should enter into this proposal to make earn extra return using Euro money and converting into dollar and investing in the US. This is looking good deal to me thus boss should also look into it and approve it.