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Intro

New York Greater Bank is a U.S. investment bank that wants to benefit from the interest rate differential between the euro area and Japan. A euro () costs $1.11 today, while a yen () costs $0.0083 today. The fund expects the exchange rates to still be $1.11 per euro and $0.0083 per yen in 9 months. Current annual interest rates are as follows:

Currency	Borrowing rate	Lending rate
Euro	7.5%	6.9%
Yen	4.8%	4%

The bank doesn't want to invest any of its own money, but can borrow 10,000,000 or 1,000,000,000.

Assume there are 30 days in every month and 360 days per year. Ignore compounding when working with the interest rates.

Attempt 1/5 for 7 pts.

Part 1

Should the bank borrow euros or yen?

Yen

Euros

Correct

Since the euro area has higher interest rates than Japan, the fund should borrow yen and invest the borrowed amount in euros.

Attempt 1/6 for 7 pts.

Part 2

What is the value of one euro in yen?

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Attempt 1/6 for 7 pts.

Part 3

What is the value of the borrowed amount in euro?

Submit

Attempt 1/6 for 7 pts.

Part 4

What is the value of the invested amount after 9 months (in euro)?

Submit

Attempt 1/6 for 7 pts.

Part 5

What is the value of loan, including principal and interest, after 9 months (in yen)?

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Attempt 1/6 for 7 pts.

Part 6

What is the expected value of euros required to pay off the yen loan and interest (in euros):

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Attempt 1/6 for 7 pts.

Part 7

What is the expected profit from the transaction (in euros)?

Submit

Attempt 1/6 for 7 pts.

Part 8

What is the expected profit from the transaction (in $)?

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