You expect that the INR will depreciate against the dollar from its spot rate of
ID: 2773012 • Letter: Y
Question
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
The transaction can be structured as follows
On Day 1
Borrow INR 100,000 at 15% and purchase USD spot at $ 0.15
Invest USD proceeds at 1.0%
On day 60
Take Maturity proceeds of USD Deposit
Convert to INR at $ 0.125 and repay the INR borrowing
Profit from round-trip = INR 17,700
working
Lending Rate
Borrowing Rate
US Dolar
1.0%
2.5%
INR
12.0%
15.0%
Spot rate expected to decline from $ 0.15 to $ 0.125 in 60 days
Maximum Borrowing Limits
USD $ 1500
INR 100,000
On Day 1
Borrow INR 100,000 at 15% and purchase USD spot at $ 0.15
Invest USD proceeds at 1.0%
On day 60
Take Maturity proceeds of USD Deposit
Convert to INR at $ 0.125 and repay the INR borrowing
Profit from round-trip = INR 17,700
Lending Rate
Borrowing Rate
US Dolar
1.0%
2.5%
INR
12.0%
15.0%
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