In: Finance
An American bank expects the euro to depreciate from its present level of $1.35/euro to $1.25/euro in 60 days. They intend to borrow 20 million euros at a rate of 6.5% annually and they can lend in the U.S. at 6% annually. Don’t worry about compounding of the interest rate. What is their total profit/loss from this transaction? Show your work and the flow of funds for full credit.
First they will borrow Euros 20,000,000 |
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Current rate Euro 1 = $1.35 |
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So, conversion in dollars = 20,000,000*1.35= $27,000,000.00 | |
Lend in U.S. at 6% interest rate for 60 days |
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Interest earned = Amount * interest rate * no. of days/365 |
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27000000 dollars * 6/100 * 60/365 |
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$266,301.37 | |
Total amount of Principal and interest earned in dollars |
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= 27,000,000 + 266,301.37 |
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$27,266,301.37 | |
Exchange rate in 60 days, Euro 1 = $1.25 |
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Conversion in Euros = 27,266,301.37/1.25 = €21,813,041.10 | |
Interest payable on amount borrowed |
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= 20,000,000 euros * 6.5% * 60/365 |
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€213,698.63 | |
Profit or loss from this transaction = Amount earned in Euros - Amount repaid of principal and interest in Euros |
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21,813,041.10 - 20,000,000 - 213698.63 | |
€1,599,342.47 | |
So, profit earned on this transaction is Euro 1,599,342.47. |
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