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23 July, 08:56

Assume the following information regarding U. S. and European annualized interest rates:Currency Lending Rate Borrowing RateU. 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?

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  1. 23 July, 12:26
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    Profit from speculating is $5,79,845

    Explanation:

    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
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