Suppose That You Are the Treasurer of IBM with an Extra

Multiple Choice

Suppose that you are the treasurer of IBM with an extra U.S.$1,000,000 to invest for six months.You are considering the purchase of U.S.T-bills that yield 1.810 percent (that's a six month rate,not an annual rate by the way) and have a maturity of 26 weeks.The spot exchange rate is $1.00 = ¥100,and the six month forward rate is $1.00 = ¥110.The interest rate in Japan (on an investment of comparable risk) is 13 percent.What is your strategy?

A) Take $1m,invest in U.S.T-bills.
B) Take $1m,translate into yen at the spot,invest in Japan,and repatriate your yen earnings back into dollars at the spot rate prevailing in six months.
C) Take $1m,translate into yen at the spot,invest in Japan,hedge with a short position in the forward contract.
D) Take $1m,translate into yen at the forward rate,invest in Japan,hedge with a short position in the spot contract.