examples of entrepreneur
Examples
For our illustration purpose consider investing € 1000 for 1 year.
We'll consider two investment cases viz:
Case I: Domestic Investment
In the U.S.A., consider the spot exchange rate of $1.2245/€ 1.
So we can exchange our € 1000 @ $1.2245 = $1224.50
Now we can invest $1224.50 @ 3.0% for 1 year which yields $1261.79 at the end of the year.
Case II: Foreign Investment
Likewise we can invest € 1000 in a foreign European market, say at the rate of 5.0% for 1 year.
But we buy forward 1 year to lock in the future exchange rate at
$1.20025/€ 1 since we need to convert our € 1000 back to the domestic currency, i.e. the U.S. Dollar.
So € 1000 @ of 5.0% for 1 year = € 1051.27
Then we can convert € 1051.27 @ $1.20025 = $1261.79
Thus, in the absence of arbitrage, the Return on Investment (RoI) is same regardless of our choice of investment method.
There are two types of IRP.
1. Covered Interest Rate Parity (CIRP)
Covered Interest Rate theory states that exchange rate forward premiums (discounts) offset interest rate differentials between two sovereigns.
In another words, covered interest rate theory holds that interest rate differentials between two countries are offset by the spot/forward currency premiums as otherwise investors could earn a pure arbitrage profit.
Covered Interest Rate Examples
Assume Google Inc., the U.S. based multi-national company, needs to pay it's European employees in Euro in a month's time.
Google Inc. can achieve this in several ways viz:
Buy Euro forward 30 days to lock in the exchange rate. Then Google can invest in dollars for 30 days until it must convert dollars to Euro in a month. This is called covering because now Google Inc. has no exchange rate fluctuation risk.
Convert dollars to Euro today at spot exchange rate. Invest Euro in a European bond (in Euro) for 30 days (equivalently loan out Euro for 30 days) then pay it's obligation in Euro at the end of the month.
Under this model Google Inc. is sure of the
For our illustration purpose consider investing € 1000 for 1 year.
We'll consider two investment cases viz:
Case I: Domestic Investment
In the U.S.A., consider the spot exchange rate of $1.2245/€ 1.
So we can exchange our € 1000 @ $1.2245 = $1224.50
Now we can invest $1224.50 @ 3.0% for 1 year which yields $1261.79 at the end of the year.
Case II: Foreign Investment
Likewise we can invest € 1000 in a foreign European market, say at the rate of 5.0% for 1 year.
But we buy forward 1 year to lock in the future exchange rate at
$1.20025/€ 1 since we need to convert our € 1000 back to the domestic currency, i.e. the U.S. Dollar.
So € 1000 @ of 5.0% for 1 year = € 1051.27
Then we can convert € 1051.27 @ $1.20025 = $1261.79
Thus, in the absence of arbitrage, the Return on Investment (RoI) is same regardless of our choice of investment method.
There are two types of IRP.
1. Covered Interest Rate Parity (CIRP)
Covered Interest Rate theory states that exchange rate forward premiums (discounts) offset interest rate differentials between two sovereigns.
In another words, covered interest rate theory holds that interest rate differentials between two countries are offset by the spot/forward currency premiums as otherwise investors could earn a pure arbitrage profit.
Covered Interest Rate Examples
Assume Google Inc., the U.S. based multi-national company, needs to pay it's European employees in Euro in a month's time.
Google Inc. can achieve this in several ways viz:
Buy Euro forward 30 days to lock in the exchange rate. Then Google can invest in dollars for 30 days until it must convert dollars to Euro in a month. This is called covering because now Google Inc. has no exchange rate fluctuation risk.
Convert dollars to Euro today at spot exchange rate. Invest Euro in a European bond (in Euro) for 30 days (equivalently loan out Euro for 30 days) then pay it's obligation in Euro at the end of the month.
Under this model Google Inc. is sure of the