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Unformatted text preview: GEB3373 February 16th Hours 1 and 2 Denslow s former student: Martin Ebner Martin Ebner graduated 1996 from the University of Florida Martin goes back to Switzerland after graduating and quickly became involved in the insurance industry as well as banking. In 1982 / 1983 Martin s net worth was $2 billion dollars Denslow saw Martin a few years later, Martin said he had 1 million and wanted to invest it in U.S. Treasury securities. Denslow thought the money would perform better in Swiss Franks Ra = Interest rate in America Rs = Interest rate in Switzerland Ra = 4% Rs = 6% 1983 Swiss Franks 1,000,000 1984 Swiss Franks 1,000,000 x 1.06 = 1,060,000 e($) = Swiss Franks 1 / $ 1,000,000 x 1.04 = 1,040,000 Swiss Franks 1.04/$ Martin actually gets 1,081,600 Martin, however, insisted on investing in U.S. Treasury securities because he had received insider information from someone in the Fed who told him they would be raising interest rates to ght ination. This means the dollar will appreciate. It turns out Martin was wrong. In 1984 the exchange rate was not Swiss Franks 1.04/$ When you are looking to invest you must account for Interest Rate Parity! Interest Rate Parity: Ra=Re e*($) = Change in Exchange rate of the dollar Re = Exchange rate in Europe An appreciation of the dollar ($) compensates for a lower rate of interest. This applies only to hard currencies that are convertible. 5% = 8% - 3% Re= 6% Ra = 8% e*($) = 1% Invest? Is there equilibrium? Invest in the United States However, Not in equilibrium because no one will invest in both countries at the same time....
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