Suppose that the treasurer of Amazon has an extra cash reserve of $250,000,000 to invest for six months

Finance Dec 21, 2020

Suppose that the treasurer of Amazon has an extra cash reserve of $250,000,000 to invest for six months. The six-month interest rate is 6 percent per annum in the United States and 5 percent per annum in Germany. Currently, the spot exchange rate is €1.02 per dollar and the six-month forward exchange rate is €0.99 per dollar. The treasurer of Amazon does not wish to bear any exchange risk. Where should he or she invest to maximize the return?

Expert Solution

Option 1 : Invest in the US

value after 6 months = 250,000,000 * 1.03 = 257,500,000

option 2: invest in Germany

amount invested in Eur = 250,000,000 * 1.02

amount after 6 months in Eur = 250,000,000 * 1.02 * 1.025

amount after 6 months in USD = 250,000,000 * 1.02 * 1.025/0.99 = 264,015,151.52

so it is better to invest in Euros

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