| Course | INV-7110 Investments |
|---|---|
| Module | Module 4 |
| Paper type | Final project paper: investing client funds in two foreign currencies |
| Length | About 1,116 words, 7 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | Master of Business Administration |
| Updated | October 2026 |
Free sample paper for INV 7110 Module 4
Francs and Yen for a Dollar Investor: A Profit-Sharing Currency Mandate
Student Name
Master of Business Administration, Thomas Edison State University
INV-7110: Investments
Mentor Name
Month Day, Year
Francs and Yen for a Dollar Investor: A Profit-Sharing Currency Mandate
Introduction
A small group of clients has asked a composite registered investment adviser in Princeton, New Jersey, to invest $1 million for one year in two hard foreign currencies, held as interest-bearing deposits. The agreement gives the manager 20 percent of any profit measured in dollars and nothing if the investment loses money. Hard currencies are those of stable economies with credible central banks, open capital markets and freely traded exchange rates. Reilly et al. (2019) note that returns on foreign investments for a dollar investor combine the return in the foreign currency with the change in the exchange rate, and for a currency deposit the exchange rate dominates. The paper follows the stages of the project: the shortlist named in Module 1, the interim report discussed with classmates and the final choice and plan.
Choosing the Currencies
The interim report considered the euro, the British pound, the Canadian dollar, the Swiss franc and the Japanese yen. After the Module 2 live session, where classmates questioned whether the euro and the pound offered anything a dollar investor could not get from U.S. assets, the final choice was the franc and the yen. They offer different reasons for holding them: the franc as a store of value with a record of strength, the yen as a currency that many measures suggest is undervalued.
The Swiss Franc
Switzerland has a long record of low inflation, a large current account surplus and public debt that is low relative to its economy. The Swiss National Bank has at times intervened to slow the franc's rise, and it lowered its policy rate to zero in 2025, so franc deposits earn almost no interest. The case for the franc rests on its behavior in times of stress. Ranaldo and Söderlind (2010) found that the franc tends to appreciate against the dollar when U.S. stock prices fall and market volatility rises, the defining feature of a safe haven currency. For clients whose other assets are mostly U.S. stocks, a franc position offers some protection when those assets fall.
The Japanese Yen
The yen weakened sharply from 2021 to 2024 as the Bank of Japan kept interest rates near zero while U.S. rates rose. The Bank of Japan ended its negative interest rate policy in March 2024, its first increase in seventeen years, and has raised its rate since then. Under purchasing power parity, currencies drift toward rates at which a basket of goods costs the same everywhere. Rogoff (1996) showed that deviations from parity are large and decay slowly, with half-lives of three to five years, so parity is a poor guide to next month's rate but a reasonable guide to direction over several years. By widely cited parity estimates, the yen has traded well below its parity value in recent years, which suggests room to appreciate if interest rate differentials narrow. Ranaldo and Söderlind (2010) also identify the yen as a safe haven, though a less consistent one than the franc.
Interest Rate Parity and the Cost of Holding
Covered interest rate parity says the forward exchange rate adjusts for interest differences, so an investor who hedges a franc or yen deposit back to dollars earns roughly the dollar interest rate and gains nothing. The clients are therefore paying for currency exposure by giving up the dollar interest they could earn, assumed here at 4 percent. Uncovered interest parity predicts that low-interest currencies should appreciate enough to offset this, but Fama (1984) found the opposite tendency in the data: currencies with high interest rates tended to strengthen rather than weaken, the forward premium puzzle. Brunnermeier et al. (2008) showed that strategies that borrow low-interest currencies such as the yen to buy high-interest ones earn steady returns punctuated by sudden crashes, when the funding currency jumps. A yen holder is on the other side of that trade and benefits when such positions are unwound quickly.
Planning Rates and Scenarios
The manager invests $500,000 in each currency at planning rates of 0.80 francs and 150 yen per dollar, with franc deposits earning 0 percent and yen deposits 0.5 percent for the year.
In the base case, the yen recovers a tenth of its value toward parity and the franc gains modestly. The manager's 20 percent share of the $71,154 profit is $14,231, leaving the clients a net return of about 5.7 percent, above the 4 percent dollar alternative. In the adverse case, both currencies weaken, the clients lose about 5.3 percent and the manager earns nothing. If rates do not change, the clients earn 0.3 percent less a $500 fee, well below the dollar alternative.
| Scenario | Franc per dollar at year end | Yen per dollar at year end | Value in dollars | Return |
|---|---|---|---|---|
| Base case | 0.78 | 135 | $1,071,154 | 7.1% |
| Adverse | 0.84 | 160 | $947,284 | minus 5.3% |
| Flat rates | 0.80 | 150 | $1,002,500 | 0.3% |
Risks
The main risk is that U.S. interest rates stay higher than those in Switzerland and Japan for longer, keeping both currencies weak, as in 2022 and 2023. Intervention is a second risk: the Swiss National Bank can sell francs to stop appreciation, and Japan's authorities have bought yen to slow its decline, both of which change the path of rates. A third is concentration: two currencies cannot diversify away a broad dollar rally. The profit-sharing fee adds an incentive risk, since the manager shares gains but not losses, which can encourage larger positions than the clients would choose; the mandate limits each currency to half the funds and bars borrowing.
Hedging Choices
Hedging the positions with forward contracts would remove the currency exposure the clients want, so the mandate leaves them unhedged. The manager will, however, use a stop rule: if either currency falls 8 percent from the entry rate, half of that position is converted back to dollars, limiting the loss in a scenario worse than the adverse case. Options would offer protection with unlimited upside, but their cost, often several percent a year for a one-year at-the-money option, would consume much of the expected gain. The clients will receive a monthly statement showing each position's value in dollars and the distance to the stop level.
Conclusion
The mandate holds the Swiss franc for its safe haven behavior and the Japanese yen for its distance below parity and its potential to rise as Japanese rates normalize. The clients give up dollar interest of about 4 percent for a base-case return of 7.1 percent before fees and 5.7 percent after, with an adverse case of minus 5.3 percent. The positions are unhedged, sized equally and protected by a stop rule, and the profit-sharing fee rewards the manager only if the clients gain.
References
Brunnermeier, M. K., Nagel, S., & Pedersen, L. H. (2008). Carry trades and currency crashes. NBER Macroeconomics Annual, 23, 313-347. https://doi.org/10.1086/593088
Fama, E. F. (1984). Forward and spot exchange rates. Journal of Monetary Economics, 14(3), 319-338. https://doi.org/10.1016/0304-3932(84)90046-1
Ranaldo, A., & Söderlind, P. (2010). Safe haven currencies. Review of Finance, 14(3), 385-407. https://doi.org/10.1093/rof/rfq007
Reilly, F. K., Brown, K. C., & Leeds, S. J. (2019). Investment analysis and portfolio management (11th ed.). Cengage.
Rogoff, K. (1996). The purchasing power parity puzzle. Journal of Economic Literature, 34(2), 647-668.
INV 7110 Module 4 instructions, in plain terms
The INV-7110 final project is built in stages: you name candidate currencies to your mentor in Module 1, share an interim report in the Module 2 live session, choose two hard currencies and explain why in an updated report, and submit the final paper at the end of Module 4. The paper casts you as an investment manager investing clients' funds in two foreign currencies under a profit-sharing agreement. Explain your choices with economic data and theory, address risks and hedging, and show what the clients and the manager would earn under different outcomes. Use current data from central banks and statistical agencies, and cite research on exchange rate behavior for your theoretical claims. Keep your currency choices consistent with the interim report, or explain what changed your mind after the live session.
Inside the INV 7110 Module 4 example
The paper sets out the mandate and the fee, then explains how the two currencies were chosen from a wider list after the live session. A section on each currency makes its distinct case with research on safe havens and parity. An interest parity section explains the cost of holding low-interest currencies and the research on why that cost can be worth bearing. A scenario table shows outcomes in dollars, with the fee and the clients' net return. Risk and hedging sections cover rates, intervention, concentration, the fee's incentives, a stop rule and the cost of options. Every scenario figure can be recomputed from the planning rates and deposit yields given in the text, and the fee is applied only to gains, as the agreement requires.
INV 7110 Module 4 rubric: what earns full marks
Mentors grade the final project on the quality of the currency research, accurate use of parity theory and research, realistic analysis of risk and return, and clear writing. Papers that give each currency its own reason for inclusion, and that quantify scenarios including the fee, show the analysis the assignment asks for. Recognizing the incentive problem in profit sharing demonstrates judgment beyond the finance. Current facts about central bank policy, stated accurately, add credibility, and research citations support the theory. Mentors also value papers that state the assumptions behind each scenario, such as the planning rates and deposit yields, so the results can be checked. Discussing the limits of parity theory, such as the slow decay of deviations, shows careful reading of research. A conclusion that summarizes returns, risks and the fee in a few sentences helps the reader.
INV 7110 Module 4 help from the desk
Students lose points by choosing currencies without an economic case, by ignoring the interest given up or by forgetting the profit-sharing fee in the returns. Others cite parity theory without noting how slowly deviations close. Give each currency a reason. Compare the expected return with the dollar alternative. Show the fee's effect in each scenario. Explain your hedging choice and its cost. Check every fact about policy rates and central bank actions against a current source before submitting. Build the paper on four questions: why these two currencies, the likely return, the main dangers and how each is handled. A free first sample on your own INV-7110 final project is available on request.
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INV 7110 Module 4 questions, answered
Where can I find a free INV 7110 Module 4 sample paper?
Swiss francs and Japanese yen under a profit-sharing mandate form the final project above.
What is a hard currency?
The currency of a stable economy with a credible central bank, open capital markets and a freely traded exchange rate.
What is a safe haven currency?
A currency that tends to strengthen when stock markets fall and volatility rises, such as the Swiss franc.
What does purchasing power parity predict?
That exchange rates move toward levels that equalize the price of goods, though deviations close slowly.
Why might a manager not hedge a currency mandate?
Because hedging with forwards removes the currency exposure the clients want and earns roughly the home interest rate.