Question

Below are the US and Country F lending and borrowing rates. The current exchange rate is $2.4000/ CRF.1-month

	1 Month Lending Rate	1 Month Borrowing Rate
U.S.	0.50%	0.67%
Country F	4.00%	0.42%

a.) Assume you borrow $10,000,000 in the US. Calculate the amount you will owe in 1 month.

b.) Assume you convert the $10,000,000 into CRF and lend that money. Calculate the amount of CRF you will receive in 1 month.

c.) Assume the CRF appreciates to $2.4098/1 CRF in one month. Calculate your net profit or loss in US dollars based on the amount you will receive and the amount you will owe.

Answer 1

a.
Calculate amount you owe in 1 month in US dollar
Amount owe in U.S in one month	Amount borrowed*(1+interest rate)
Amount owe in U.S in one month	$10,000,000*(1.0067)
Amount owe in U.S in one month	$10,670,000
b.
Calculate amount you would receive in 1 month in CRF
Amount received	(10000000/2.40)*(1.04)
Amount received in CRF	4,333,333
c.
CRF amount converted into U.S.	4333333.33*2.4098
CRF amount converted into U.S.	$10,442,466.67
Net profit (loss)	Amount received in US dollar -Amount payable in US dollar
Net profit (loss)	10442466.67-10670000
Net profit (loss)	-$227,533.33
Thus, net loss is $227,533.33