Assume the following information.
$\bullet$Interest rate on borrowed euros is 5 percent annualized.
$\bullet$Interest rate on dollars loaned out is 6 percent annualized.
$\bullet$Spot rate is 1.10 euros per dollar (one euro = $0.909).
$\bullet$Expected spot rate in five days is 1.15 euros per dollar.
$\bullet$Fabrizio Bank can borrow 10 million euros.
If Fabrizio Bank attempts to capitalize on the above information, its profit over the five-day period is

Question

Assume the following information. 
$\bullet$Interest rate on borrowed euros is 5 percent annualized.
$\bullet$Interest rate on dollars loaned out is 6 percent annualized.
$\bullet$Spot rate is 1.10 euros per dollar (one euro = $0.909).
$\bullet$Expected spot rate in five days is 1.15 euros per dollar.
$\bullet$Fabrizio Bank can borrow 10 million euros.
If Fabrizio Bank attempts to capitalize on the above information, its profit over the five-day period is

Quizplus · Accepted Answer

1. Use the borrowed 10 million euros to buy dollars at the spot rate: 
10,000,000 euros x 1.10 = $11,000,000

2. Loan out the $11,000,000 at 6% annualized rate: 
Interest earned in 5 days = $11,000,000 x 6% x (5/365) = $301,369.86

3. Convert the dollars back to euros at the expected spot rate in 5 days: 
$11,000,000 x 1/1.15 = 9,565,217.39 euros

4. Repay the borrowed euros with interest: 
10,000,000 euros x 5% x (5/365) = 68,493.15 euros

5. Calculate profit: 
9,565,217.39 - 10,000,000 - 68,493.15 = $496,724.86 = 455,266.81 euros (using the spot rate of 1.10)

Therefore, the best answer is B, as it represents the profit earned by Fabrizio Bank over the five-day period.

Assume the Following Information ∙\bullet∙ Interest Rate on Borrowed Euros Is 5 Percent Annualized

Assume the Following Information $\bullet$ Interest Rate on Borrowed Euros Is 5 Percent Annualized