Blue Demon Bank expects that the Mexican peso will depreciate against the dollar
ID: 2720317 • Letter: B
Question
Blue Demon Bank expects that the Mexican peso will depreciate against the dollar from its spot rate of $0.15 to $0.14 in 10 days. The following interbank lending and borrowing rates exist:
Lending Rate
Borrowing Rate
U.S. dollar
8.0%
8.3%
Mexican peso
8.5%
8.7%
Assume that Blue Demon Bank has a borrowing capacity of either $10 million or 70 million peso’s in the interbank market, depending on which currency it wants to borrow from.
How could Blue Demon Bank attempt to capitalize on its expectations without using deposited funds? Estimate the profits that could be generated from this strategy.
Assume all the preceding information with this exception: Blue Demon Bank expects the peso to appreciate from its present spot rate of $0.15 to $0.17 in 30 days. How could it attempt to capitalize on it expectations without using deposited funds? Estimate the profits that could be generated from this strategy.
Lending Rate
Borrowing Rate
U.S. dollar
8.0%
8.3%
Mexican peso
8.5%
8.7%
Explanation / Answer
capitalization on its expectations without using deposited funds
Mexican peso will depreciate against the dollar from its spot rate of $0.15 to $0.14 in 10 days,therefore blue demon bank borrow $10million = 70million peso today
Repay $10million borrowing along with interest @ 8.3% = $ 10 + 10*10/360*8.3% = 10.023
Convert in mexican peso = 10.023 / .14 = 71.59
profits generated from this strategy = 71.59- 70 = 1.59
if the peso appreciate from its present spot rate of $0.15 to $0.17 in 30 days,then blue demon bank borrow 70 million peso today (= 10million)
Repay 70million peso borrowing along with interest @ 8.7% = 70 M + 70*30/360*8.7% = 70.51
Convert in Dollar = 70.51 * 0.17 = 11.9867
profits generated from this strategy = 11.9867- 10 = $ 1.9867
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