Problem 3. You expect that the INR will depreciate against the dollar from its s

Question

Problem 3. You expect that the INR will depreciate against the dollar from its spot rate of $.0.15 to $.0.125 in 60 days. The following interbank lending and borrowing rates exist:

                                           Lending Rate            Borrowing Rate

      U.S. dollar                           1.0%                              2.5%

      INR                                    12.0%                           15.0%

How can you profit from the above given information. Estimate the profits that could be earned given your maximum borrowing limits are either $1,500 or INR 100,000?

Explanation / Answer

Interest = 100000 * 15 % = 15000

Profit = 15000 * (0.15 -0.125 )

= $ 375.

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