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:

Production Function

A production function is a mathematical model that describes the relationship between inputs used in production (like labor and capital) and the output produced.

Profit

The financial gain achieved when the revenues obtained from business activities exceed the expenses, costs, and taxes associated with maintaining the activity.

Commodity

A primary item used in trading that is replaceable with other items of the same type.

Maximise

To increase to the greatest possible amount or degree.