This Problem Considers the Effect of Currency Conversion Fees on Foreign

question 106

Essay

This problem considers the effect of currency conversion fees on foreign investment. Jonathan is considering investing $1000 in Canada, where he expects an interest rate of 5 percent, or in the U.K., where the expected interest rate would be 6 percent. The current exchange rate is £0.5/$, which could take by the end of the year any value between £0.4 and £0.6/$ with equal probability.
a) Where should Jonathan invest?
b) How does your answer change if there is a currency conversion fee of 3 percent?
c) What have you learned from this exercise?

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