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1. Finance CRN 16663 Enrique Fourzan & 09/18/20 Homework: Chapter 5 Homework core: 0 of 1 pt 4 of 7 (3 complete HW Score: 50%, 5-13 (similar to) Question Hel (Related to Checkpoint 5.5) (Solving for n) How many years wil it take for $490 to grow to $1,060.54 it's invested at 8 percent compounded annually? The number of years it will take for S490 to grow to $1,060.54 at 8 percent compounded annually is 18 years. (Round to one decimal place.) 39 9 ay for many Enter your answer in the answer box and then click Check Answer 18010 5 if it's All parts showing Clear Check Answer Sear sally?
2.While you were visiting Munich, you purchased a Range Rover for €100,000, payable in six months. You have enough cash in US dollars at your bank in NY City, which pays 3% interest for six months, to pay for the car. Currently, the spot exchange rate is $1.35/€ and the six-month forward exchange rate is $1.30/€. In Munich, the money market interest rate is 4% for six months. There are two alternative ways of paying for your Range Rover.
a. Keep the funds at your bank in the US and buy €100,000 forward.
b. Buy a certain amount of € spot today and invest the amount in Germany for six months so that the maturity value becomes equal to €100,000. Evaluate each payment method in terms of $ cost. Which method would you prefer? Why?
Expert Solution
1.
Answer : 10 years
See calculations below :
No. of years it will take for $490 at the rate of 8% compounded annually, to grow to $1060.54
Amount = P + P(1+r)t
P = Initial amount invested
r = rate of interest
t = time, no. of years
amount = final value at the end of period
Putting values in the formula above, we get :
1060.54 = 490 + 490(1+0.08)t
Solving the equation for t, we get :
t = 10 years (rounded off)
Therefore,No. of years it will take = 10 years
2.
The Range Rover price is €100,000, payable in six months.
Spot Rate: 1 € = 1.35 $
6 months Forward Rate: 1 € = 1.30 $
Interest Rate on Investment in Munich is 4 % for 6 months
Interest Rate on Investment in NY City is 3 % for 6 months
Option (a): Keep the funds at your bank in the US and buy €100,000 forward.
Here bank in NY City Pays 3% interest for 6 months
Total Payment to be made in dollar after 6 months = 100,000 * 1.30
= $ 130000
Amount of dollar required as on today:
= 130000/ (1+i)
i= 3% rate of interest for 6 months
= 130000/(1.03)
= $ 126213.60
Therefore in option (a), there is requirement of $ 126213.60 to repay €100,000 in six months.
Option (b) : Buy a certain amount of € spot today and invest the amount in Germany for six months so that the maturity value becomes equal to €100,000
As interest rate in Munich is 4% for 6 months, amount of € required to repay €100,000 is as follow:
= 100000/(1+i)
i= 4% rate of interest for 6 months
= 100000/1.04
= € 96153.85
Amount of $ Required to buy € 96153.85
Spot Rate is 1 € = 1.35 $
Therefore, $ required = 96153.85*1.35= $ 129807.70
| COMPARISON | |
| Option | Outflow of $ |
| (a) | 126213.6 |
| (b) | 129807.7 |
Therefore Option (a) should be preferred.
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