Question 2 Ithaca (Greece) considers placing 30 percent of its excess funds in a one-year Singapore dollar deposit and the remaining 70 percent of its funds in a one-year US dollar deposit. The...

Question 2

Ithaca (Greece) considers placing 30 percent of its excess funds in a one-year Singapore dollar deposit and the remaining 70 percent of its funds in a one-year US dollar deposit. The Singapore one-year interest rate is 15 percent, while the US one-year interest rate is 10 percent. The possible percentage changes in the two currencies for the next year are forecasted as follows:

Namibia

Botswana

30-day deposit rate

10%

9%

30-day borrowing rate

12%

11%

Possible outcomes

Probability

1.30

27%

1.38

39%

1.05

34%

1

Currency

Possible percentage change in the spot rate over the investment horizon

Probability of that change in the spot rate occurring

Singapore dollar

-2%

20%

Singapore dollar

1

60

Singapore dollar

3

20

US dollar

1

50

US dollar

4

40

US dollar

6

10

Given this information, determine the possible effective yields of the portfolio and the probability associated with each possible portfolio yield. If the one-year euro interest rate is 8 percent, what is the probability that the portfolio’s effective yield will be lower than the yield achieved from investing in the United States? (Assume that the movements on the two currencies are not correlated). (25)