Question

21. loe has $10,000 to deposit either in US or in Germany. Joe can earn 6% APR in US bank and 800 APR in German bank. Transaction cost for investing in Germany is $150. The spot and 1-year for- ward rates on euro are 1.00 $1.20 and 1.00 $1.27 respectively. Should Joe take USD or EURO deposit and why?

Answer 1

Total amount after one year if deposited in US = 10,000 + 10,000*6% = $10,600

Option2:Invest in Germany

Fixed cost = $150

Amount converted into Euro = 9,850/1.20 = $8,208.33

Invest and get 8,208.33(1+8%) = $8,865

Convert back into $ at forward rate = 8,865*1.27 = $11,258.55

Hence, the investor should invest in Germany i.e. Euro deposit since higher return