15 points) Assume the following information regarding U.S. and European annualized interest rates: Currency Lending Rate Borrowing Rate U.S. Dollar ($) 6.73% 7.20% Euro (€) 6.80% 7.28% Trainor Bank can borrow either $20 million or €20 million. The current spot rate of the euro is $1.13. Furthermore, Trainor Bank expects the spot rate of the euro to be $1.10 in 90 days. What is Trainor Bank's dollar profit from speculating if the spot rate of the euro is in fact $1.10 in 90 days?

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Karabo99 Karabo99 · Answer 1 · 2019-10-10T14:36:13+02:00

Answer:

The Trainor Bank's dollar profit from speculating if the spot rate of the euro is in fact $1.10 in 90 days is $5,79,845

Explanation:

Bank Z borrow = €20 million

Spot rate 1€ = $1.13

Convert € in to $

€20 million *1.13 = $22.60 million

Lend $2,26,00,000 at interest rate of 6.73% for 90 days ( Assume total number of days in a year is 360)

= $2,26,00,000 + $2,26,00,000*(90/360)*6.73%

= $2,29,80,245

We need to find the euro to be repaid = €2,00,00,000 + €2,00,00,000*7.28%*(90/360)

= €2,03,64,000

To be repaid in $:-

€2,03,64,000*1.10 = $2,24,00,400

Profit from speculating in $ = $2,29,80,245 - $2,24,00,400

= $5,79,845

Therefore, The Trainor Bank's dollar profit from speculating if the spot rate of the euro is in fact $1.10 in 90 days is $5,79,845