20. Speculation. 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: U.S. dollar Mexican peso Lending Rate 8.0% 85 Borrowing Rate 8.3% 8.79% 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. 2. 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 ANSWER: 1) A best efforts offering is one in which A) the underwriter bears the risk of an unsuccessful offering. B) the bid-ask spread is exceptionally high, but the investment banker does his best to sell the issue anyway. C) the investment banker acts as a principal for the issuer. D) the investment banker acts only as a distribution agent. E) the issue can only be privately placed 2) Investment firms that pool money from individuals and/or institutions and invest equity funds in start-up firms are called A) top-tier bankers. B) Section 20 affiliates. C) venture capital firms. D) ECNs. E) discount brokerage houses. 3) You buy euros in New York from Deutsche Bank and simultaneously sell them in London to Barclays for a gain. This is an example of A) position trading. B) program trading C) risk arbitrage D) pure arbitrage. E) hedging 4) An unregistered issue sold to a few large institutional buyers is an example of an) A) best efforts offering. B) fully underwritten public offering. C) shelf offering D) private placement. E) SEC Rule 415 offering. 5) An investment banker agrees to a firm commitment offering of two million shares of Ace stock. The offer price is set at $55 and the spread is 50 cents per share. If the stock is actually sold to the public at $53.80, however, what is the investment banker's gain or loss? A) $1,400,000 gain B) $1,400,000 loss C) $500,000 gain D) $500,000 loss E) None of these options are correct