Assume the following information regarding U.S. and European annualized interest rates:
$\begin{array} { l c c }
\text { Eurrenc } & \text { Lendine Rtite } & \text { Earrawine Ratp } \
\text { U.S. Dallw (\$) } & 6.73 \% & 7.20 \% \
\text { Eura (E) } & 6.80 \% & 7.28 \%
\end{array}$
Trensor Bank can borrow either $20 million or €20 million. The current spot rate of the euro is $1.13. Furthermore, Trensor Bank expects the spot rate of the euro to be $1.10 in 90 days. What is Trensor Bank's dollar profit from speculating if the spot rate of the euro is indeed $1.10 in 90 days?
A) $579,845.
B) $583,800.
C) $588,200.
D) $584,245.
E) $980,245.

Question

Assume the following information regarding U.S. and European annualized interest rates:
$\begin{array} { l c c } 
\text { Eurrenc } & \text { Lendine Rtite } & \text { Earrawine Ratp } \
\text { U.S. Dallw (\$) } & 6.73 \% & 7.20 \% \
\text { Eura (E) } & 6.80 \% & 7.28 \%
\end{array}$
Trensor Bank can borrow either $20 million or €20 million. The current spot rate of the euro is $1.13. Furthermore, Trensor Bank expects the spot rate of the euro to be $1.10 in 90 days. What is Trensor Bank's dollar profit from speculating if the spot rate of the euro is indeed $1.10 in 90 days?
A) $579,845.
B) $583,800.
C) $588,200.
D) $584,245.
E) $980,245.

Quizplus · Accepted Answer

SOLUTION:
1. Barraw €2] million.
2. Convert the $€ 20$ million to $€ 20,000,000 \times \$ 1,13 = \$ 22,600,000$.
3. Invest the $\$ 22,600,000$ at an annualized rate of $6.73 \%$ for 90 days.
$\begin{array} { l } 
\$ 22,600,000 \times [ 1 + 6.73 \% ( 90 / 360 ) ] \
= \$ 22,980,245
\end{array}$
4. Determine eurds owrd: $€ 20,000,000 \times [ 1 + 7.28 \% ( 90 / 360 ) ] = € 20,364,000$.
5. Determine dollars needed to repay eura loan: $€ 20,364,000 \times \$ 1.10 = \$ 22,400,400$
6. The dollar profit is $\$ 22,980,245 - \$ 22,400,400 = \$ 579,845$.

Assume the Following Information Regarding U Trensor Bank Can Borrow Either $20 Million or €20 Million