An American bank expects the euro to depreciate from its present level of $1.35/euro to $1.25/euro...

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Finance

An American bank expects the euro to depreciate from its presentlevel of $1.35/euro to $1.25/euro in 60 days. They intend to borrow20 million euros at a rate of 6.5% annually and they can lend inthe U.S. at 6% annually. Don’t worry about compounding of theinterest rate. What is their total profit/loss from thistransaction? Show your work and the flow of funds for fullcredit.
Borrow 20M euro’s at $1.35/euro
Holds $27M (20,000,000 X 1.35)
Lends at 6% annually for 60 days.
Exchange back at $1.25/euro
Return principal and interest to bank

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3.8 Ratings (479 Votes)

First they will borrow Euros 20000000 Current rate Euro 1 135 So conversion in dollars 20000000135 2700000000 Lend in US at 6 interest See Answer

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An American bank expects the euro to depreciate from its presentlevel of $1.35/euro to $1.25/euro in 60 days. They intend to borrow20 million euros at a rate of 6.5% annually and they can lend inthe U.S. at 6% annually. Don’t worry about compounding of theinterest rate. What is their total profit/loss from thistransaction? Show your work and the flow of funds for fullcredit.Borrow 20M euro’s at $1.35/euroHolds $27M (20,000,000 X 1.35)Lends at 6% annually for 60 days.Exchange back at $1.25/euroReturn principal and interest to bank