Question

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

Answer 1

Profit from speculating is $5,79,845

Step-by-step explanation:

Bank Z borrow = €20 million

Spot rate 1€=$1.13

Convert € in to $

€20 million *1.13=$22.60 million

Lend $2,26,00,000 at interest rate of 6.73% for 90 days ( Assume total number of days in a year is 360)

=$2,26,00,000+ $2,26,00,000 *(90/360)*6.73%= $2,29,80,245

We need to find the euro to be repaid

= €2,00,00,000 + €2,00,00,000*7.28%*(90/360)

= €2,03,64,000

To be repaid in $:-

€2,03,64,000*1.10= $2,24,00,400

Profit from speculating in $= $2,29,80,245 - $2,24,00,400= $5,79,845