FIN645 645 RMWilson, Inc., is a U.S. based MNC that has been aggressively doing business in Eastern Europe

| April 14, 2018

RMWilson, Inc., is a U.S. based MNC that has been aggressively doing business in Eastern Europe since the Iron Curtain was lifted in 1989. Poland has allowed its currency to be market determined. The spot rate of the Polish zloty is $0.4911 Bid and $0.4923 Asked. Poland has also begun to allow foreign investors, as a method of attracting funds to help build its economy. Its interest rate on one-year securities offered by the federal government is 6.76%, which is substantially higher than the 1.97% rate currently offered on one-year U.S. Treasury securities.A local bank has begun to create a forward market in the zloty. The bank has quoted a one year forward rates of $0.4581 bid and $0.4679 asked. As an employee of Wilson’s international money market division, you have been asked to assess the possibility of investing short-term funds in the Poland. You are in charge of investing $15 million over the next year. Your objective is to earn the highest return possible while maintaining safety (since the firm will need the funds next year).Though Poland seeks to join the Euro zone, due to current economic conditions, there is a high probability that the zloty’s value will be very volatile through the next year. The expected value of the zloty a year from now is $0.49 but there is a high degree of uncertainty about this. The actual value may be as much as 30% above or below the expected value.a. Would you be willing to invest in Poland without covering your position? Explain.b. Suggest how you could use covered interest rate arbitrage. What is the expected return from using covered interest rate arbitrage?c. What are the risks of using covered interest rate arbitrage here?d. If you have your choice between investing in U.S. Treasuries at 1.97% or using covered interest rate arbitrage what is your choice? Justify your answer.

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