A bank in Venezuela borrows $5 million in U.S. dollars, promising to repay the loan plus 6% interest at the end of the year. The currency in Venezuela is the “bolivar.” The bank converts the dollars to bolivars at an exchange rate of 1600 bolivars to the dollar, and loans them out to a borrower who promises to repay them at the end of the year, plus 8% interest.
Figure out how much money the bank makes on the loan if the exchange rate stays fixed for the year.
What about if the exchange rate starts at 1600 bolivars to the dollar but rises to 1800 during the year?
What about if the exchange rate changes to 1500 bolivars to the dollar during the year?