Recommending a Short Term Foreign InvestmentSuppose the treasurerof your company finds out you are...

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Recommending a Short Term Foreign Investment

Suppose the treasurerof your company finds out you are enrolled in BUS450 InternationalFinance. Knowing this, yourtreasurerseeks your advice. Your company has extra cash reserves of $100,000,000 andneedsto invest it for 6 months.The treasurerhas heard that investing in foreigncurrenciesfor the short term mighthave a higher yield when compared to ashort term United States investment.Research the following:

The US 6month interest rate

The 6month interest rate of a country of yourchoosing

Thespotexchangerate of your selected currency relative totheUS Dollar

The six-month forward exchangerateper the US Dollar.

Prepare aproposalto your treasurerthat outlines your research and recommendation.Provide calculations where necessary to support your recommendation.Summarize your findings in a three- to five- page paper, not including title and references pages.Be sure to properly cite your resources using APA style.

The Week Three Assignment

Must be three to five double-spaced pages in length, and formatted according to APA style as outlined in the Ashford Writing Center.

Must include a title page with the following:
- Title of paper
- Student’s name
- Course name and number

Instructor’s name

Date submitted

Must begin with an introductory paragraph that has a succinct thesis statement.

Must address the topic of the paper with critical thought.

Must end with a conclusion that reaffirms your thesis.

Must use at least three scholarly sources.

Must document all sources in APA style, as outlined in the Ashford Writing Center.

Must include a separate references page, formatted according to APA style as outlined in the Ashford Writing Center.

Carefully review theGrading Rubric(Links to an external site.)for the criteria that will be used to evaluate your assignment.

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Ishmeet Singh · Accepted Answer

WOQOD PROJECT
	
	International Financial
Management
	         Date: 04/10/2020
	
	
	
Assignment: ‘Interest Rate Parity – A comparative study of USD vs. Yen(Assumed)’
                                                                                                                 Submitted By: 
 
	Rev. no.
	Date
	Purpose
	Approved by
	
	
	
	
INTEREST RATE PARITY THEORY:
· High interest rate in one country leads to depreciation of currency of that country.
· It says that the interest rate prevailing between two countries will affect the foreign exchange rate.
· If interest rate are different then the forex rate will move in such a way that it will get the two nations at parity.
(Simply said it will tend to get the currencies/forex rate at equilibrium means they will offset the difference, thus ruling out the arbitrage opportunity which will be explain ahead via practical example.)
IRPT Calculator
Japanese Yen vs. USD
Japanese Interest Rate=7
US Interest Rate=9
Yen vs Dollar i.e. 
1$ equals 
=150
Yens
Scenario 1:
Invest in Japan
Amount with me =1500 Yens
After 1 year=1605Maturity Value(i)
Scenario 2:
Invest in US
Amount with me =1500 Yens
In Dollars=10
After 1 year=10.9Maturity Value(ii)
(i) / (ii)=147.2477Forward forecasted Exchange Rate after 1 year
Therefore, it will nullify the difference 
No profit for arbitrageurs in either case
Percentage %
GRAPHICALLY:
ASSUMPTIONS:
1. Funding is available. (Step 1 where we borrowed 1500 Yens)
2. Free Capital Mobility. (Scenario 1 & 2)
3. No defaults/country risk. (Step 3 & 4 back convertions)
4. Absence of frictions like taxes and transaction costs.
5. Forward market is liquid for short maturities, however for emerging countries forward market is liquid for short maturities but assuming US & Japan to be having atleast 1 year period.
SCENARIO OVER LAST 15 Yrs. (Taking practical example):
	Interest Rates: 
	
	
	
	
	
	Sr. No.
	Year
	Interest Rate
US
	Interest Rate
Japan
	
	1
	2004
	2.36
	1.50
	
	2
	2005
	4.38
	1.38
	
	3
	2006
	6.06
	1.74
	
	4
	2007
	5.94
	1.68
	
	5
	2008
	2.45
	1.49
	
	6
	2009
	0.5
	1.35
	
	7
	2010
	0.73
	1.18
	
	8
	2011
	0.75
	1.13
	
	9
	2012
	0.75
	0.86
	
	10
	2013
	0.75
	0.71
	
	11
	2014
	0.75
	0.

Recommending a Short Term Foreign Investment Suppose the treasurerof your company finds out you are enrolled in BUS450 InternationalFinance. Knowing this, yourtreasurerseeks your advice. Your company...

Recommending a Short Term Foreign Investment

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