4) (8 pts) Speculation. Blue Demon Bank expects that the Mexican peso will depreciate against the dollar from its spot rate of $0.058 to $0.053 in 30 days. The following interbank lending and borrowing nominal annualized rates exist:

Lending Rate Borrowing Rate

U.S. dollar 4.0% per yr 4.4% per yr

Mexican peso 8.2% per yr 8.8% per yr

Assume that Blue Demon Bank has a borrowing capacity of either $10 million or 170 million pesos in the interbank market, depending on which currency it wants to borrow.

b. Assume all the preceding information with this exception: Blue Demon Bank expects the peso to appreciate from its present spot rate of $0.058 to $0.064 in 90 days. How could it attempt to capitalize on its expectations without using deposited funds? Estimate the profits that could be generated from this strategy.