Question

Assume the following information regarding U.S. and European annualized interest rates: Currency Lending Rate Borrowing Rate U.S. Dollar ($) 6.73% 7.20% Euro (€) 6.80% 7.28% Trainor Bank can borrow either $20 million or €20 million. The current spot rate of the euro is $1.13. Furthermore, Trainor Bank expects the spot rate of the euro to be $1.10 in 90 days. What is Trainor Bank's dollar profit from speculating if the spot rate of the euro is in fact $1.10 in 90 days?

Answer 1

profit from speculating = $579845

Step-by-step explanation:

given data

Lending Rate

US dollar $ = 6.73 %

Euro € = 6.80%

Borrow rate

US dollar $ = 7.20%

Euro € = 7.28%

Trainor Bank borrow = $20 million or €20 million

spot rate of the euro = $1.10 in 90 days

to find out

What is Trainor Bank's dollar profit from speculating if the spot rate of the euro is in fact $1.10 in 90 days

solution

we have given spot rate and borrow money 20 million

so convert € to $ is = €20 × 1.13 = $22.60 million

so

if we consider 360 days in a year

lend 22.60 million at interest rate 6.67 % for the 90 days is

= 22.60 million + 22.60 million× ( 6.67%) ×
`(90)/(360)`

= 22980245

so

euro to be repaid is with rate 7.28% for 90 days

= € 20000000 + € 20000000 × ( 7.28%) ×
`(90)/(360)`

= € 20364000

so repaid in $ is

€ 20364000 × 1.10

= $22400400

so profit from speculating is in $ = $22980245 - $22400400

profit from speculating = $579845