Exhibit 7-1 Assume the Following Information

question 53

Multiple Choice

Exhibit 7-1
Assume the following information:
You have $300,000 to invest:
The spot bid quote for the euro (€) is $1.08
The spot ask quote for the euro is $1.10
The 180-day forward rate (bid) of the euro is $1.08
The 180-day forward rate (ask) of the euro is $1.10
The 180-day interest rate in the United States is 6%
The 180-day interest rate in Europe is 8%
-Refer to Exhibit 7-1 above. If you conduct covered interest arbitrage, what amount will you have aFter 180 days?

• A)$318,109.10
• B)$330,000.00
• C)$312,218.20
• D)$323,888.90
• E)none of the above

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Definitions:

Highly Liquid Securities

Financial instruments that can easily be converted into cash with minimal impact on their price.

Low-Risk Securities

Investments that have a lower chance of loss or default, often characterized by more stable returns.

Historical Cost Principle

An accounting principle that states that assets should be recorded and reported at their original purchase cost.

Stock Investments Account

An account on the balance sheet that represents the cost of buying and holding shares of another company.