Answer:
$ 1,024,000
Explanation:
Spot Rate : 1 Pound = $ 1.30
3 Months Forward Rate = $ 1.28
3 Months Deposit rate in US = 2.25%
3 Months Deposit rate in Great Britain = 4%
Total Amount of Investment = $ 1,000,000.
Step 1:
Convert $ 1,000,000 into Pounds using Spot rate (i.e., 1 Pound = $ 1.30).
We will get,
= $1000,000 ÷ 1.30
= 769230.76923 Pounds.
Step 2:
Invest 769230.76923 Pounds in great Britain for 3 months at an interest rate of 4%.
Therefore, we have an interest of 30769.23076 Pounds.
Hence, the total realizable value after 3 months:
= 769230.76923 + 30769.23076
= 800,000 Pounds
Step 3:
Convert 800,000 Pounds into Dollars using Forward rate (i.e., 1 Pound = $ 1.28).
Therefore, the total amount in Dollars:
= 800,000 Pounds × $ 1.28
= $ 1,024,000
