Question

Assume the following information regarding U.S. and Canadian annualized interest rates:

Currency	Lending Rate	Borrowing Rate
U.S Dollar ($)	5.89%	6.35%
Canadian Dollar (C$)	5.6%	6%

Piggy Bank can borrow either $20 million or C$30 million. Furthermore, Piggy Bank expects the spot rate of the Canadian dollar to be $0.82 in 60 days (the current spot rate is $0.80).

8.

What is the profit or loss from Piggy Bank's speculation if the spot rate 60 days from now is indeed $0.82?

a. $454,200

b. $479,667

c. $20.69 million

d. $20.21 million

e. $502,166

13.What is Piggy Bank's profit or loss from speculation if the spot rate 60 days from now is indeed $0.78?

a. $606,440

b. $24.24 million

c. $601,600

d. C$24.24 million

e. C$601,600

14.What amount will the borrowed amount convert to today?

a. $16 million

b. $25 million

c. C$24.39 million

d. C$25 million

e. C$16 million 16. Malone Bank also plans to speculate on the Canadian dollar's currency movements, but it expects the Canadian spot rate 60 days from now to be $0.78. Based on this information, what amount will the borrowed amount convert to today? a. $24 million b. $16 million c. C$24 million d. C$ 16 million

Answer 1

I have answered the question below

Please up vote for the same and thanks!!!

Do reach out in the comments for any queries

Answer:

8)

Piggy bank can achieve speculation profit by taking advantage of interest rate differentials.

US borrowing interest rate = 6.35%*60/360 = 1.05833333%

Candian deposit rate = 5.60%*60/360 = 0.9333333%

For suppose Piggy bank borrowed $20 million.

Convert $20 million in to candian dollars at $0.8 = $20/$0.8 = C$25 million

Deposit C$ 25 million in canada for 60 days @ 5.60% = C$25*(1+0.93333333%) = C$25.2333333 million

Reconvert C$25.233333 million into dollars after 60 days at $0.82 = C$25.2333333 million*$0.82 = $20.691333 million

After 60 days it should repay $20 million *(1+1.0583333%) = $20.2116667 million.

-------------------------------------------------------------------------

Difference between Reconvert $ and $ payable = $20.691333 million - $20.2116667 million.

Speculation profit = $0.479667 million or $479,667.

13)

The correct answer here would be, Malone Bank's profit or loss from speculation if the spot rate 60 days from now is indeed $0.78

$601,600

14)

When $ 20 million is converted at 0.8$ / C $ into Canadian Dollars one get = 20 / 0.8 = C $ 25 million

16)

C30,000,000*0.80=24 Million