Suppose That You Are the Treasurer of IBM with an Extra

question 12

Multiple Choice

Suppose that you are the treasurer of IBM with an extra U.S. $1,000,000 to invest for six months. You are considering the purchase of U.S. T-bills that yield 1.810% (that's a six month rate, not an annual rate by the way) and have a maturity of 26 weeks. The spot exchange rate is $1.00 = ¥100, and the six month forward rate is $1.00 = ¥110. The interest rate in Japan (on an investment of comparable risk) is 13 percent. What is your strategy?

• A)Take $1m, invest in U.S. T-bills.
• B)Take $1m, translate into yen at the spot, invest in Japan, and repatriate your yen earnings back into dollars at the spot rate prevailing in six months.
• C)Take $1m, translate into yen at the spot, invest in Japan, hedge with a short position in the forward contract.
• D)Take $1m, translate into yen at the forward rate, invest in Japan, hedge with a short position in the spot contract.

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Definitions:

Stress

A state of mental or emotional strain or tension resulting from adverse or demanding circumstances.

Rationalization

The process of providing reasonable explanations to justify behaviors or decisions that may otherwise appear irrational.

Projection

A psychological defense mechanism where individuals attribute their own undesirable thoughts, feelings, or motives to another person.

Displacement

In psychology, a defense mechanism where an individual redirects emotions or reactions from the original source to another target.