Assume the following information regarding u. s. and european annualized interest rates: currency lending rate borrowing rate u. s. dollar ($) 6.73% 7.20% euro (€) 6.80% 7.28% trainor bank can borrow either $20 million or €20 million. the current spot rate of the euro is $1.13. furthermore, trainor bank expects the spot rate of the euro to be $1.10 in 90 days. what is trainor bank's dollar profit from speculating if the spot rate of the euro is in fact $1.10 in 90 days?

profit from speculating = $579845

Explanation:

given data

Lending Rate

US dollar $ = 6.73 %

Euro € = 6.80%

Borrow rate

US dollar $ = 7.20%

Euro € = 7.28%

Trainor Bank borrow = $20 million or €20 million

spot rate of the euro = $1.10 in 90 days

to find out

What is Trainor Bank's dollar profit from speculating if the spot rate of the euro is in fact $1.10 in 90 days

solution

we have given spot rate and borrow money 20 million

so convert € to $ is = €20 × 1.13 = $22.60 million

so

if we consider 360 days in a year

lend 22.60 million at interest rate 6.67 % for the 90 days is

= 22.60 million + 22.60 million× ( 6.67%) ×

= 22980245

so

euro to be repaid is with rate 7.28% for 90 days

= € 20000000 + € 20000000 × ( 7.28%) ×

= € 20364000

so repaid in $ is

€ 20364000 × 1.10

= $22400400

so profit from speculating is in $ = $22980245 -  $22400400

profit from speculating = $579845

answer; be sure that the information on file is correct;

after cutting wages and benefits in order to increase profit .

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