Question

Assume the following information.

Interest rate on borrowed euros is 5 percent annualized.
Interest rate on dollars loaned out is 6 percent annualized
Spot rate is 1.10 euros per dollar (one euro = $0.909).
Expected spot rate in five days is 1.15 euros per dollar.
Fabrizio Bank can borrow 10 million euros.
If Fabrizio Bank attempts to capitalize on the above information, what is its profit over the five-day period?

Answer 1

To calculate the profit over the five-day period, we need to compare the interest earned from borrowing euros with the interest earned from loaning out dollars. The profit is the difference between these two values.

Step-by-step explanation:

To calculate the profit over the five-day period, we need to compare the amount earned from borrowing euros with the amount earned from loaning out dollars.

First, let's calculate the interest earned from borrowing euros. Given that Fabrizio Bank can borrow 10 million euros at an interest rate of 5 percent, the interest earned over five days would be:

Interest = Principal * Rate * Time
Interest = 10,000,000 euros * 0.05 * (5/365) = 6849.32 euros

Next, let's calculate the interest earned from loaning out dollars. Assuming the loaned amount is the equivalent value of 10 million euros, the interest earned over five days would be:

Interest = Principal * Rate * Time
Interest = $10,000,000 * 0.06 * (5/365) = $8219.18

Therefore, the profit over the five-day period would be the difference between the interest earned from loaning dollars and borrowing euros:

Profit = Interest from Dollars - Interest from Euros
Profit = $8219.18 - 6849.32 = $1369.86