3. (a) A US company is sending one of its employees to study Danish in...
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3. (a) A US company is sending one of its employees to study Danish in an intensive training course in Copenhagen. He will need Danish Krone (DKK) 10,000 at t = 3 months when classes begin, and DKK 6,000 at t = 6 months, t = 9 months, and t = 12 months to cover his tuition and living expenses. The exchange rates and p.a. interest rates are the following: USS DKK Exchange rate p.a. interest rate USD p.a. interest rate DKK Spot 5.820-5.830 3.82-4.07 8.09-8.35 90 days 5.7655.770 180 days 5.713-5.720 270 days 5.660-5.680 3.94-4.19 8.00-8,26 4.13-4.38 7.99-8.24 360 days 5.640-5.670 4.50-4.75 7.83-8.09 The company wants to lock in the DKK value of its employee's expenses. Is it indifferent between buying DKK forward and investing in DKK for each time period that he should receive his allowance? (Hint: compare direct and synthetic rates) (30%)
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