Response to the following problem:
Speculation Diamond Bank expects that the Singapore dollar will depreciate against the U.S. dollar from its spot rate of $.43 to $.42 in 60 days.
The following interbank lending and borrowing rates exist:
|
CURRENCY
|
LENDING RATE
|
BORROWING RATE
|
|
U.S. dollar
|
7.0%
|
7.2%
|
|
Singapore dollar
|
22.0%
|
24.0%
|
Diamond Bank considers borrowing 10 million Singapore dollars in the interbank market and investing the funds in U.S. dollars for 60 days. Estimate the profits (or losses) that could be earned from this strategy. Should Diamond Bank pursue this strategy?