A hedge fund wants to take advantage of current interest rates. It projects that the pound to dollar and euro to dollar exchange rates will remain the same one month from now. Assume that the current exchange rates are $1.1500 per euro, $1.3500 per pound, and 0.85185 pounds per euro. The hedge fund will pay 0.6% annual interest rate to borrow in euro in Germany. It will receive 1.2% annual interest in the U.K. to invest in pounds. (Hint: Take the interest rate times 30/360, or approximately 0.08333333, to find the 30 -day interest rate.) At the beginning of an investment period, a hedge fund converts $500,000 of its own money into 370,370 pounds. It borrows 5,000,000 euro and converts them into 4,259,250 pounds. It then invests 4,629,620(4,259,250+370,370) pounds at 0.1%(1.2%/12 months), ending with 4,634,250 pounds. The hedge fund then repays its loan in euro. It will need 5,002,500 euro (5,000,0001.0005), where 1.0005=1+0.006/12. Of the fund's remaining pounds, it will use 4,261,380 pounds to repay the euro borrowed. Given current exchange rates, how many dollars in profit does the hedge fund earn in this case? $503,375 $372,870 $3,375 $5,756,238