5. Suppose you could borrow at 0.5% in EUR and earn 6% in Brazil (both for one year). Suppose also the current exchange rate is EURBRL 5.00. Finally, you are fairly certain the EUR will not spike in value too much over the coming months/years.

a. You will execute a carry trade. What three things do you do today? You have a credit line at Deutsche Bank of 20,000,000.

b. Suppose the rate in one year is (1) EURBRL 4.85 and (2) EURBRL 5.45. What profit/loss did you realize?

NOTE: be careful with the form of the exchange rates. In the example, we borrowed in JPY (the second currency of AUDJPY). In this problem, we borrow EUR (the first currency of EURBRL).