Assume the following annualized interest rates: Bank Pinetree can borrow either $5 million or foreign currency (FC) 5 million. The current spot rate of the foreign currency (FC) is $1.13 and the Bank expects the spot rate to be $1.10 in 90 days. What is the bank’s dollar profit from speculating if the spot rate of the foreign currency (FC) is indeed $1.10 in 90 days? Assume the lending rate for FC and $ is 6.8% and 6.73%, respectively. The borrowing rate for FC and $ is 7.28% and 7.2% for FC and $, respectively.
A. $106,372
B. $220,478
C. $144,961
D. $269,517
Answer : C. $144,961
Working noted for the above answer
1
. Borrow
€5million.
2. Convert the €5 million to €5,000,000 x $1.13 = $5,650,000.
3. Invest the $ 5,650,000 at an annualized rate of 6.73% for 90 days.
$5,650,000 x [1 + 6.73% (90/360)]
= $5745061
4. Determine euros owed: €5000,000 x [1 + 7.28% (90/360)] = €5091000.
5. Determine dollars needed to repay euro loan: €5090100 x $1.10 =
=$ 5600100
.
6. The dollar profit is $5745061- $5600100
= $144961.
