Suppose the CFO of an American corporation with surplus cash flow had $50million to invest last March 20, 2015 and the corporation did not believe it would need to utilize these funds to retool or expand production capacity for 1 year. Suppose further that the interest rate on 1year CD deposits in US banks was 1%, while the rate on 1 year CD deposits in England (denominated in British Pounds) was 2% at the time. Suppose further that the exchange rate at that time was $1.55 per British pound. A) Suppose that now a year later the exchange rate is $1.42 per British pound. What rate of return did the CFO earn on the investment in the British CD?
What must the CFO have expected about the value of the British pound in $ today to believe in March, 2015that investment in 1 year British CD’s would be more profitable than investment in US CD’s.