Suppose you have $1000 that serves as margin for a $9000 one year loan where the...

Suppose you have $1000 that serves as margin for a $9000 one year loan where the US interest rate is 2%. You invest the total = $10,000 in Europe where the exchange rate is $1.25 $/€. The one year interest rate in Europe is 8%.

Consider the following two scenarios:

Scenario #1: The $/€ exchange rate remains constant over the holding period = 1 year

Scenario #2: The exchange rate after one year is 1.2 $/€

You must show all work for full credit.

a) (10 points) Assuming scenario #1 and that you invested the total $10,000 in Europe, what is your profit / loss and your rate of return in $ when you close your position?

b) (10 points) Assuming scenario #2, what is your profit / loss and your rate of return in $ when you close your position?

Expert Solution

Rahul Sunny answered 4 months ago

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