GEB3373Feb16 - GEB3373 February 16th Hours 1 and 2 Denslow...

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Unformatted text preview: GEB3373 February 16th Hours 1 and 2 Denslow ʼ 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 ʼ 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 in¢ation. 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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This note was uploaded on 03/12/2012 for the course GEB 3373 taught by Professor Crum during the Spring '10 term at University of Florida.

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GEB3373Feb16 - GEB3373 February 16th Hours 1 and 2 Denslow...

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