Question

In: Finance

An American bank expects the euro to depreciate from its present level of $1.35/euro to $1.25/euro...

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.

  1. Borrow 20M euro’s at $1.35/euro
  2. Holds $27M (20,000,000 X 1.35)
  3. Lends at 6% annually for 60 days.
  4. Exchange back at $1.25/euro
  5. Return principal and interest to bank

Solutions

Expert Solution

First they will borrow Euros 20,000,000

Current rate Euro 1 = $1.35

So, conversion in dollars = 20,000,000*1.35= $27,000,000.00

Lend in U.S. at 6% interest rate for 60 days

Interest earned = Amount * interest rate * no. of days/365

27000000 dollars * 6/100 * 60/365

$266,301.37

Total amount of Principal and interest earned in dollars

= 27,000,000 + 266,301.37

$27,266,301.37

Exchange rate in 60 days, Euro 1 = $1.25

Conversion in Euros = 27,266,301.37/1.25 = €21,813,041.10

Interest payable on amount borrowed

= 20,000,000 euros * 6.5% * 60/365

€213,698.63

Profit or loss from this transaction = Amount earned in Euros - Amount repaid of principal and interest in Euros

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.

Please thumbs up.


Related Solutions

Diamond Bank expects that the Singapore dollar will depreciate against the U.S. dollar from its spot...
Diamond Bank expects that the Singapore dollar will depreciate against the U.S. dollar from its spot rate of $.43 to $.42 in 60 days. The following interbank lending and borrowing rates exist: Currency Lending Rate Borrowing Rate Dollars 7. 0% 7.2% Singapore dollar 22.0% 24.0% Diamond Bank considers borrowing 10 million Singapore dollars in the interbank market and investing the funds in U.S. dollars for 60 days. Estimate the profits (or losses) that could be earned from this strategy. Should...
a) The Evergreen Bank expects that the Peso (P) will depreciate against the     US $ from...
a) The Evergreen Bank expects that the Peso (P) will depreciate against the     US $ from its spot rate of $0.43 to $0.42 in 90 days. The following interbank     lending and borrowing rates exist:                                 Currency Lending Rate    Borrowing Rate                                    US $ 7%                 7.2%                                       P 22%              24% The Evergreen Bank considers borrowing$430,000 or its equivalent Peso amount in the interbank market and investing the proceeds for 90 days. Estimate the speculative profits (or losses) that could be earned from this strategy....
A New York City Bank expects the exchange rate for the euro to appreciate from the...
A New York City Bank expects the exchange rate for the euro to appreciate from the spot rate of $0.60 to $0.65 in 90 days. The Bank is able to borrow $15 million or 25 million euros. The short term interest rates (annualized) in the interbank market are as follows: CURRENCY                                          LENDING RATE                                           BORROWING RATE U.S Dollars                                                 6.72%                                                            7.2% Euro                                                           6.48%                                                            6.96% (a)How will this bank attempt to capitalize on this expected change in exchange rate to make a speculative...
)A New York City Bank expects the exchange rate for the euro to appreciate from the...
)A New York City Bank expects the exchange rate for the euro to appreciate from the spot rate of $0.60 to $0.65 in 90 days. The Bank is able to borrow $15 million or 25 million euros. The short term interest rates (annualized) in the interbank market are as follows: CURRENCY                            LENDING RATE                      BORROWING RATE U.S Dollars                                    6.72%                     7.2% Euro                                              6.48%                  6.96% (a)How will this bank attempt to capitalize on this expected change in exchange rate to make a speculative...
)(a)Suppose the MIDLAND bank expects the New Zealand dollar (NZ$) will depreciate against the US$ from...
)(a)Suppose the MIDLAND bank expects the New Zealand dollar (NZ$) will depreciate against the US$ from its spot rate of $0.43 to $0.42 in 60 days. The following interbank lending and borrowing rates exist: Currency Lending Rate Borrowing Rate US$ 7% 7.2% NZ$ 22.0% 24% Midland Bank has access to NZ$ 10million or US$ 4.3million.How can the bank attempt to make a speculative profit based on expected exchange rate movement without risking depositors money? Estimate the profit (or losses) that...
Suppose you get the following quotes from Bank A and B on Euro.             Bank...
Suppose you get the following quotes from Bank A and B on Euro.             Bank A            Bid Ask     Bank B         Bid                   Ask USD1.2610/EU USD1.2630/EUR USD1.2640/EUR USD1.2660/EUR You realize that you can use local arbitrage to take advantage of the quotes difference. If you could put as much as $1 million into the arbitrage, how much would be your arbitrage profits? To get full credits, you need to include step by step instructions on how to carry out this strategy.
Your company is considering to take a loan from the local bank. Bank charges a 1.25%...
Your company is considering to take a loan from the local bank. Bank charges a 1.25% interest rate per quarter. Then the rate 1.25*4 =5% is called ____    annual percentage rate discount rate compound interest rate effective annual rate
The Bank of Canada raised its benchmark interest rate to 1.25 per cent Wednesday and signalled...
The Bank of Canada raised its benchmark interest rate to 1.25 per cent Wednesday and signalled that, b arring certain risks, more hikes are likely in the rest of the year. ... Even before Wednesday’s decision, five of the country’s largest banks hiked five - year fixed rates 15 basis points to 5.14 per cent last week. (CIBC is still offering 4.99 per cent.)..... The change in the benchmark interest rate was 25 basis points (from 1% to 1.25%) on...
MSU Bank believes the New Zealand dollar will depreciate over the next 6 months from NZ$2.20/USD...
MSU Bank believes the New Zealand dollar will depreciate over the next 6 months from NZ$2.20/USD to NZ$2.25/USD. The following 6-month interest rates apply: (the rates are periodic rates so you do not need to adjust them at all – we do not need to multiply by 180/360 or anything like that)       Currency                                 Lending (deposit) Rate             Borrowing Rate       Dollars                                                1.25%                                      1.55%       New Zealand dollar (NZ$)                  1.75%                                      2.05% MSU Bank has the capacity to borrow either...
Assume that a bank expects to attract most of its funds through short-term CDs and would...
Assume that a bank expects to attract most of its funds through short-term CDs and would prefer to use most of its funds to provide long-term loans. How could it follow this strategy and still reduce interest rate risk?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT