Question

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.

	Lending Rate	Borrow Rate
U.S.	6.73%	7.20%
Euro	6.80%	7.28%

A. $579,845.

B. $583,800.

C. $588,200.

D. $783,210

E. $980,245.

Answer 1

Step 1 : Borrow euro currency 20million at 7.28%. The dollar value will be 20,000,000*1.14 = $22,800,000 and lend it at 6.73%.

Step 2 : Payback euro currency after 90 days at the price = 20,000,000*(1+ Borrowing Rate*Days/360)*Days/360

= 20,000,000*(1 + 0728*(90/360)) = 20,364,000

Step 3 : Receive the money in dollar equal to 22,800,000 + interest rate for 90 days that will be equal to

22,800,000*(1 + 0.0673*90/360) = $23,183,610

Step 4 : Convert the euro borrowed rate in dollar at 1.10 rate i.e. 20,364,000*1.10 = 22,400,400

Step 5 : Caluclate your profit as as following :

Profit = Received amount - Borrowed amount = 23,183,610 - 22,400,400= $783,210

Hence, the correct option is D. $783,210