You expect that the Mexican peso will appreciate against the Australian dollar from its spot rate...

You expect that the Mexican peso will appreciate against the Australian dollar from its spot rate of A$0.2275 to A$0.2552 in one year. The following interbank lending and borrowing rates exist:

Lending Rate Borrowing Rate

Australian dollar 7.92% 8.96%

Mexican peso 8.18% 9.31%

You have a borrowing capacity of either 3 million Australian dollars or 5 million Mexican pesos in the interbank market. Without using your own deposited fund, estimate the profits in percentage. (enter 2 decimal places number with no sign or symbol)

Solutions

Expert Solution

Definition –

- A$ = Australian $

- MP = Mexican Peso

- Spot Rate = A$ 0.2275 / MP

- Expected Rate after 1 year = A$ 0.2552/ MP

Hence, expected rate change is (0.2552 -0.2275)*100/0.2275 = 12.176%

- Since A$ is becoming stronger against MP by 12.176% as compared to the Borrowing Rate of 8.96% - We should Borrow A$ & invest in MP.

Calculation of Profits –

jeff jeffy answered 1 year ago

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