Calculate the U.S. dollar value of the hedged investment at the end of 90 days for each of the two… 1 answer below »

René Michaels, CFA, plans to invest $1 million in U.S. government cash equivalents for the next 90 days. Michaels’s client has authorized her to use non–U.S. government cash equivalents, but only if the currency risk is hedged to U.S. dollars by using forward currency contracts.

a. Calculate the U.S. dollar value of the hedged investment at the end of 90 days for each of the two cash equivalents in the table below. Show all calculations.

b. Briefly explain the theory that best accounts for your results.

c. On the basis of this theory, estimate the implied interest rate for a 90-day U.S. government cash equivalent.

Interest Rates 90-Day Cash Equivalents

Japanese government

7.6%

Swiss government

8.6%

Exchange Rates Currency Units per U.S. Dollar

Spot

90-Day forward

Japanese yen

133.05

133.47

Swiss franc

1.5260

1.5348