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Chapter 21 Solution



Chapter 21 5. Investing Strategy Tallahassee Co. has $2 million in excess cash that it has invested in Mexico at an annual interest rate of 60 percent. The U.S. interest rate is 9 percent. By how much would the Mexican peso have to depreciate to cause such a strategy to backfire? 10. Effective Yield Repeat question 9, but this time assume that Rollins, Inc., expects the 180-day forward rate of the pound to substantially overestimate the spot rate to be realized in 180 days. 14. Interest Rate Parity Dallas Co. has determined that the interest rate on euros is 16 percent while the U.S. interest rate is 11 percent for 1-year Treasury bills. The 1-year forward rate of the euro has a discount of 7 percent. Does interest rate parity exist? Can Dallas achieve a higher effective yield by using covered interest arbitrage than by investing in U.S. Treasury bills? Explain 17. Impact of September 11 Palos Co. commonly invests some of its excess dollars in foreign government short-term securities in order to earn a higher short-term interest rate on its cash. Describe how the potential return and risk of this strategy may have changed after the September 11, 2001, terrorist attack on the United States.


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