Business, 23.11.2020 14:00 sophie5988
The entrepreneurial attitude of the firm prompts it to think out of the box. How? What? Carry trade pops up. After some research, Nanotronics assembles the following data with the aim of executing a carry trade practice on $65,000.00 of its cash in the first round. In the first round, the firm stays conservative and decides not to tie up more than $65,000.00, with the aim of having its final position in USD. The firm needs to decide whether to invest (or deposit) the funds in the U. S. or in Mexico. The firm is looking for a riskless investment activity. Its horizon is exactly 9 months.
The following data are assembled. Note: Nanotronics is neither a banker nor an FX (foreign exchange) dealer. It takes the rates and figures in the market as they are given to it.
Spot rate: Buy rate MXN 19.235/USD;
Spot rate: Sell rate MXN 19.385/USD
Nine-month forward rate: Buy rate MXN 20.115/USD
Nine-month forward rate: Sell rate MXN 20.265/USD
U. S commercial interest rate (borrowing) 4.5 percent
U. S commercial interest rate (lending) 1.0 percent
Mexico commercial interest rate (borrowing or lending) 6.5 percent
What happens if Nanotronics relaxes its desire to stay riskless?
Discuss the pros and cons of such investment practice?
Would it be possible to forecast the outcome if the risk factor is left open (not managed)?
At the outset, how can a person check whether the U. S. and Mexican markets are in equilibrium or disequilibrium?
Answers: 2
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The entrepreneurial attitude of the firm prompts it to think out of the box. How? What? Carry trade...
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