Use the information below to calculate the expected gain or loss on the carry trade strategy for an initial borrowed amount of 1,000,000 (you will have to determine the currency of borrowing). Keep at least two decimals in your calculations but round up or down at the end (enter the final answer without decimals).
Current spot rate of Polish zloty (PLN/EUR) 4.25
Expected future spot rate of of zloty (PLN/EUR) in three months 4.2
Annualized three-month interest rate on Polish zloty (%) 2.85
Annualized three-month interest rate on euros (%) 0.9
| 3 Month Interest Rate Polish zloty = 2.85%*3/12 = 0.7125% | |||||||||
| 3 Month Interest Rate euros = 0.9%*3/12 = 0.225% | |||||||||
| There are 2 options, either borrow in euros or in polish zloty. | |||||||||
| Only 1 option gives you profit. | |||||||||
| First we assume that borrow an amount in euros @ 0.225% for 3 months. | |||||||||
| Steps - | |||||||||
| 1) Convert €1,000,000 into Polish zloty at Current spot rate of 4.25/€. | |||||||||
| 2) We receive Polish zloty 4,250,000 (€1,000,000 * 4.25/€) | |||||||||
| 3) Invest Polish zloty @ 0.7125% for 3 months. | |||||||||
| 4) After 3 months we receive Polish zloty 4,280,281 (4,250,000*(1+0.7125%)) | |||||||||
| 5) Convert Polish zloty 4,280,281 at future spot rate of polish zloty 4.20/€. | |||||||||
| 6) We receive €1,019,115. | |||||||||
| 7) We have to repay €1,002,250 borrowed amount (€1,000,000*(1+0.225%)). | |||||||||
| 8) Gain will be €16865 (€1,019,115 - €1,002,250). | |||||||||
| As the transaction converted into profit, amount of 1,000,000 borrowed in euros. | |||||||||
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