solution

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

Hint: Please look over sample question in Unit 4 before attempting this question for it is a tough one.

Currency

U.S. Dollar ($) Euro (€)

Lending Rate

6.73% 6.80%

Borrowing Rate

7.20% 7.28%

Amegy Bank can borrow either $20 million or €20 million. The current spot rate of the euro is $1.14. Furthermore, Amegy Bank expects the spot rate of the euro to be $1.10 in 90 days. What is Amegy Bank’s dollar profit from speculating if the spot rate of the euro is indeed $1.10 in 90 days? Assume 360 days in a year for simplicity and set your decimal to at least 8 places.

1. $579,845.

2. $583,800.

3. $588,200.

4. $783,210

5. $980,245.