Problem
Intro Pacific Investment Bank is a U.S. investment bank that wants to speculate on the dollar-euro exchange rate. A euro (€) costs $1.14 today. The bank expects it to cost $1.19 in 7 months. Current annual interest rates are as follows: Currency Borrowing rate Lending rate Euro 4.9% 4.1% U.S. dollar 7.2% 6.8% The bank doesn't want to use any of its own money, but could borrow either $10,000,000 or €10,000,000. Assume there are 30 days in every month and 360 days per year. Ignore compounding when working with the interest rates.
A. What is the initial value of the foreign currency after conversion (in euro)?
B. What is the foreign currency value after investing it for 7 months (in euro)?
C. What is the expected value of the investment after investing it for 7 months and converting it back to the home currency (in dollars)?
D. What amount is necessary to pay back the loan with interest (in $)?
E. What is the expected profit from the trade after paying off the loan and interest (in $)?