Business, 14.05.2021 01:40 kaitherusher

Suppose that California Co., a U. S. based MNC, seeks to capitalize a difference in interest rates between euros and British pounds via the use of a carry trade. In particular, after 1 month, funds invested in euros will yield a 0.50% percent return, while funds invested in pounds will yield a return of 2.00% percent. Currently the spot rate of the British pound is $1.00 while the spot rate of the euro is $0.80. In other words, the pound is worth 1.25 euros. California Co. expects these spot rates to remain constant over the next month. After 1 month, California Co. now has 612,000 pounds after investing their converted pounds. However, it is now time for California Co. to repay the 500,000 euro loan. If California Co. borrowed these euros at the prevailing rate of 0.50% percent, they must repay a total of euros. At the cross rate of 1.25, this repayment is equivalent to pounds. Thus, after repaying the loan, California Co. will have pounds.

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Suppose that California Co., a U. S. based MNC, seeks to capitalize a difference in interest rates b...

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