A currency speculator expects the spot rate of Euros to change from $1.20 to $.80 in...

A currency speculator expects the spot rate of Euros to change from $1.20 to $.80 in one year. Assume the speculator has access to credit lines of USD 12,000,000 in the US and EUR 10,000,000 in Europe. The annual borrowing and lending rates are 6 percent in US and 8 percent in Europe. If his forecast turns out to be true, at the end of the one-year period, the speculator's expected profit will be?

Solutions

Expert Solution

Borrow in EUR 10,000,000

Convert into USD at spot rate and get 10,000,000*1.2 = $12,000,000

Invest for one year and get 12,000,000*(1.06) = $12,720,000

Convert back into EUR and get 12,720,000/0.80 = EUR 15,900,000

Repay loan 10,000,000*(1+8%) = EUR 10,800,000

Expected Profit = EUR 5,100,000 or USD 4,080,000

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

A currency speculator expects the spot rate of British Pounds (GBP) to change from $2.00 to...

A currency speculator expects the spot rate of British Pounds (GBP) to change from $2.00 to $2.20 in 6-months. Assume the speculator has access to credit lines of USD 20,000,000 in the US and GBP 10,000,000 in UK. The annual borrowing and lending rates are 6 percent in US and 4 percent in UK. If his forecast turns out be to true, at the end of the 6-month period, the speculator’s expected profit will be: A currency speculator expects...

A currency speculator expects the spot rate of British Pounds(GBP) to change from $2.00 to $2.20...

A currency speculator expects the spot rate of British Pounds(GBP) to change from $2.00 to $2.20 in 6 months. Assume the speculator has access to credit lines of USD 20,000,000 in the US and GBP 10,000,000 in UK. The annual borrowing and lending Rates are 6 percent in the US and 4 percent in UK. In order for the speculator to take advantage from the expected spot rate change in GBP, it should?

Suppose that the $/€ spot exchange rate is 1.20 $/€ and the 1 forward rate is...

Suppose that the $/€ spot exchange rate is 1.20 $/€ and the 1 forward rate is 1.24$/€. The yields on 1 U.S. and EU. Treasury Bills are U.S 10% and EU 7%. Use the exact form interest parity condition. Note that these numbers are hypothetically constructed to give arbitrage profits. (1) Calculate the covered interest differentials using Covered IPC (extra profits from investing in EU). (2) Suppose that U.S. investor is considering a covered investment in EU Treasury bills financed...

assume the spot exchange rate for euros is 1.0949 (that is $1.0949 will purchase €1). If...

assume the spot exchange rate for euros is 1.0949 (that is $1.0949 will purchase €1). If the risk free interest rate for US dollars is 1.451%, the risk free interest rate for euro area is -0.250% and the standard deviation of changes in the exchange rate is 0.1126. 6a. What is the price of a 3-month put option on euros with a strike price of 1.1965? b. What is the price of a 3-month put option on euros with a...

The following are quotes from a currency dealer in the New York currency market: Currency Spot...

The following are quotes from a currency dealer in the New York currency market: Currency Spot quote Australian dollar (AUD/USD) 0.7832 - 0.7834 Brazilian real (USD/BRL) 3.2335 - 3.2365 British pound (GBP/USD) 1.3507 - 1.3509 Canadian dollar (USD/CAD) 1.2555 - 1.2557 Euro (EUR/USD) 1.1948 - 1.1949 Japanese yen (USD/JPY) 111.44 - 111.45 Mexican peso (USD/MXP) 19.3653 - 19.3718 New Zealand dollar (NZD/USD) 0.7181 - 0.7184 Thai baht (USD/THB) 32.1240 - 32.1430 Egyptian pound (USD/EGP) 17.6860 - 17.8460 South Korean won...

Suppose the spot rate for U.S. expressed in C$ is C$1.20 and the expected annual inflation...

Suppose the spot rate for U.S. expressed in C$ is C$1.20 and the expected annual inflation rate in Canada is 2.5% and that in the United States 2%. Using PPP forecasting model, calculate one-year forecast for the U.S. dollar. Will the dollar appreciate or depreciate? By what percentage?

The following conditions exist in the foreign exchange market: Current spot rate: 0.876 Euros / U.S....

The following conditions exist in the foreign exchange market: Current spot rate: 0.876 Euros / U.S. $ Annualized interest rate on 90-day dollar-denominated bonds: 4% Annualized interest rate on 90-day Euro-denominated bonds: 3% All financial investors expect the spot exchange rate to be 0.85 Euros / U.S. $ in 90 days. If a U.S. investor bases decisions solely on the expected rate of return, should that investor buy Euro-denominated bonds or dollar-denominated bonds? Briefly explain. If a European investor bases...

Use black scholes model For questions 5 and 6, assume the spot exchange rate for euros...

Use black scholes model For questions 5 and 6, assume the spot exchange rate for euros is 1.0949 (that is $1.0949 will purchase €1). If the risk free interest rate for US dollars is 1.451%, the risk free interest rate for euro area is -0.250% and the standard deviation of changes in the exchange rate is 0.1126. 5a. What is the price of a 3-month call option on euros with a strike price of 1.0965? b. What is the price...

QUESTION 4 A eurozone citizen observes the spot rate between euros and pounds is currently £1.04/€....

QUESTION 4 A eurozone citizen observes the spot rate between euros and pounds is currently £1.04/€. Assume the expected inflation rates over the course of the year in the eurozone and the UK are 3% and 2%, respectively. Suppose the spot rates for euros and pounds at the end of the year are as follows: $1.15/€, $1.11/£ Which of the following statements is true according to relative PPP? The euro appreciated in real terms. The pound appreciated in real terms....

The existing spot rate of the Canadian dollar is $.80. The premium on a Canadian dollar...

The existing spot rate of the Canadian dollar is $.80. The premium on a Canadian dollar put option is $.03. The exercise price is $.84. The option will be exercised on the expiration date if at all. If the spot rate on the expiration date is $.82, the profit as a percent of the initial investment (the premium paid) is: a) 0 percent b) 25 percent c) 50 percent d) 125 percent e) none of the above

Subjects