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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Definitions:

Feedback

Information provided regarding aspects of one’s performance or understanding, intended to guide future improvements.

Criticism

The analysis and judgment of the merits and faults of a literary or artistic work, or the expression of disapproval of someone or something based on perceived faults or mistakes.

Constructive Feedback

Analysis centered on the methods and results of communication, rather than the individuals participating.

Destructive Feedback

Criticism delivered with no guidance to stimulate improvement.