Carla Corp., a U.S. firm, considers placing 60% of its excess funds in a one-yea
ID: 2810817 • Letter: C
Question
Carla Corp., a U.S. firm, considers placing 60% of its excess funds in a one-year Swiss francs (CHF) deposit and the remaining 40% in euros. The forecasts of the appreciation (against the USD) of the CHF and EUR for the next year are as follows:
Currency Possible ef Probability
CHF 2% 0.20
CHF 3% 0.80
EUR 1% 0.70
EUR 3% 0.30
The annual interest rate on the CHF is 4%, the annual interest rate on the EUR is 5%, and the annual interest rate in the U.S. is 5.50%. Calculate the possible effective yields of the overall portfolio. Would you advise Carla Corp. to place its excess funds abroad or at home? (Justify your answer, considering placing the excess funds in CHF deposit only, EUR only, in the above mentioned 60-40 portfolio of currencies, and in USD only.)
Explanation / Answer
Currency
Possible percentage change
Probability
Effective yield
CHF
2%
0.20
1.04*1.02-1=6.08%
CHF
3%
0.80
1.04*1.03-1=7.12%
EUR
1%
0.70
1.05*1.01-1=6.05%
EUR
3%
0.30
1.05*1.03-1=8.15%
Investment
Currency
Effective yield
100%
CHF
0.20*6.08%+0.80*7.12%
6.91%
100%
EUR
0.70*6.05%+0.30*8.15%
6.68%
100%
USD
5.5%
5.50%
60% CHF 40% EUR
0.6*6.912 +0.4*6.68
6.82%
Carla corp should place its funds in CHF entirely as its effective yield is highest
Currency
Possible percentage change
Probability
Effective yield
CHF
2%
0.20
1.04*1.02-1=6.08%
CHF
3%
0.80
1.04*1.03-1=7.12%
EUR
1%
0.70
1.05*1.01-1=6.05%
EUR
3%
0.30
1.05*1.03-1=8.15%