Question

Q1 You have $500 to invest in either a Canadian Bank or in a German bank and wish to take advantage of the best opportunity for your investment. Provide your solutions to the undermentioned options showing all calculations using the following information. Spot exchange rate today Cdn$/Euro 1.2530. Forward exchange Rate Cdn$/Euro at the end of the year 1.2450. Interest rate Canada 5.00% and Germany 6.00%.

1) If you choose to invest in Canadian Bank

2) If you choose to invest in a German Bank

3) Which is the best alternative

Q2 You are considering a substantial investment in a major corporation and need to determine which option has the most advantages. Assume that interest rates are currently stable and there is no unusual market volatility being prevalent in todays equity markets. Compare and contrast your investment advantages and disadvantages of a medium term (3/% years) bond purchase or an equity purchase.

Answer 1

We have $ 500 either can invest in Canadian bank or German Bank. Interest rate in Canada is 5% and in Germany it is 6%

Today exchange rate =cnd$ 1.2530/Euro

Forward rate = cnd$ 1.2450/Euro

If IRP hold good sithetic forward rate would be f = 1.2530*1.05/1.06

F= 1.2411$ /Euro but it is 1.2530 it means cnd$ is at discount and Euro is at primium so if we invest in Euro it will give more return.

First we invest in Canadian bank @5%

So we get = 500*5% =25 $

Now we invest in German Bank

We have $500 we sell it @cnd$ 1.2530/Euro we get (500/1.2530)=399.0423€

Now we invest it @ 6%so we get (399.0423*1.06) =422.9838 €

Now we sell 422.9838 Euro to get (422.9838*1.2450) =226.6161

Which is more than what we get in Canadian bank by $1.6161

So investing in German Bank is best alternative.