Problem
You execute a carry trade in which you borrow 10,000 British pounds and invest in euros. You also use $10,000 of your own money. The duration of the trade is one year. The interest rates and exchange rates are shown in the following:
Pound interest rate: 4%
Euro interest rate: 6%
Current spot rate: $1.20=61 and $1.30 =$1.
You use the current exchange rates as forecasts for those in one year.
What profit would you expect as a percentage of your own fund?