1. Carry Trade Today British pounds spot rate is $1.70. Kurnick Co. has no money to invest, but it could borrow money to invest. It has been approved by a bank to borrow either 1 million dollars or 1 million pounds for one year. It can borrow dollars at 5.5% or Briitish pounds at 4.5% for one year. It can invest in a risk-free dollar deposit at 5% for one year or a risk-free British pound deposit at 4% for one year. Kurnick uses todays spot rate as its best guess of the spot rate one year from now. Determine the expected profit or loss (in dollars) if Kurnick Co. executes a carry trade for one year ?

2. Institutional Speculation Based on Expected Depreciation. Blue Demon Bank expects that the Mexican peso will depreciate against the dollar from its spot rate of $.15 to $.14 in 10 days. The following interbank lending and borrowing rates exist: Lending Rate Borrowing Rate U.S. dollar 8.0% 8.3% Mexican peso 8.5% 8.7% Assume that Blue Demon Bank has a borrowing capacity of either $10 million or 70 million peos in the interbank market, depending on which currency it wants to borrow. How could Blue Demon Bank attempt to capitalize on its expectations without using deposited funds? Estimate the profits that could be generated from this strategy?

3. Percentage Depreciation. Assume the spot rate of the British pound is $1.73. The expected spot rate one year from now is assumed to be $1.66. What percentage depreciation does this reflect (4 points)?