Assume the following information regarding U.S. and European annualized interest

Question

Assume the following information regarding U.S. and European annualized interest rates:

Currency

Lending Rate

Borrowing Rate

U.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?

Currency

Lending Rate

Borrowing Rate

U.S. Dollar ($)

6.73%

7.20%

Euro (€)

6.80%

7.28%

Explanation / Answer

Solution-

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

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.