Question

1. Currency speculation: you are given following information:
Lending rate for $ is 8.0% and for peso is 8.5%
Borrowing rate for $ is 8.3% and for peso is 8.7%
Peso tends to appreciate against US$ from $.15 to $.17 in 30 days
Your borrowing capacity is $10 million or 70 million pesos.

a. What is the interest rate on your loan?
b. After currency conversion, how much should be deposited or lent?
c. After 30 days, how much is the expected cash inflow?
d. After 30 days, how much is the expected cash outflow?
e. After 30 days, how much is the expected profit?

Answer 1

a) interest rate on loan is 8.5% for peso as given in question

b)

borrow $US $10 000 000

change in peso (MXN) 66 666 667 MXN

c) inflow-

invest of 30 days

30 day MXN lending rate @8.5% p.a. 0,007083333

Proceed from the MXN investment 67 138 889 MXN

Proceed from the MXN investment in US$ $11 749 306

d) outflow

repay the $US loan

30 day US$ borrowing rate @8.3% p.a. 0,006916667

Total cost of US$ loan $10 069 167

e)

Potential profit

Proceed from the MXN investment in US$ $11 749 306

Total cost of US$ loan $10 069 167

Potential profit in US$ $1 680 139

Please appreciate the work