Kannan

1. Assume the following information regarding U.S. and European annualized interest rates:

|Currency |Lending Rate |Borrowing Rate |

|U.S. Dollar ($) |6.73% |7.20% |

|Euro (€) |6.80% |7.28% |

Trensor Bank can borrow either $20 million or €20 million. The current spot rate of the euro is $1.13. Furthermore, Trensor Bank expects the spot rate of the euro to be $1.10 in 90 days. What is Trensor Bank's dollar profit from speculating if the spot rate of the euro is indeed $1.10 in 90 days

If bank borrows $20 million (

Conversion to €

$ 20 million by 1.13

€ 17.699 million

After 90 days ->

With Lending rate of (€) 6.8%

17.999

Converting back to $

19.799

Borrowing rate 7.20% == .36

Total pay back = 20.36

Loss .56 million dollar

If bank borrows €20 million (

Conversion to $

$22.6 million

After 90 days

.3842 ( 22.9842

Converting back to € ( 20.894

Total payback 20.364 as borrowing rate was .0728

So profit .53 million €

2.

Assume the following information:

|Current spot rate of New Zealand dollar |= |$.41 |

|Forecasted spot rate of New Zealand dollar 1 year from now |= |$.43 |

|One-year forward rate of the New Zealand dollar |= |$.42 |

|Annual interest rate on New Zealand dollars |= |8% |

|Annual interest rate on U.S. dollars |= |9% |

Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%.

$500000 /41 =...