Suppose that California Co., a U.S. based MNC, seeks to capitalize a difference in interest...
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Suppose that California Co., a U.S. based MNC, seeks to capitalize a difference in interest rates between euros and British pounds via the use of a carry trade. In particular, after 1 month, funds invested in euros will yield a 0.50% percent return, while funds invested in pounds will yield a return of 2.00% percent. Currently the spot rate of the British pound is $1.00 while the spot rate of the euro is $0.80. In other words, the pound is worth 1.25 euros. California Co. expects these spot rates to remain constant over the next month. If California Co. takes $100,000 of its own funds and converts them to pounds it would have pounds. If California Co. borrows 600,000 euros and converts them to pounds, it will have pounds.
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