A hedge fund wants to take advantage of current interest rates. It projects that the euro is very likely to strengthen over the next month. Furthermore, the fund believes it is very unlikely to see anything less advantageous than the pound to dollar and euro to dollar exchange rates remaining the same, and thus, it will use no change for its projections. Assume that the current exchange rates are $1.1300 per euro, $1.3200 per pound, and 0.85606 pounds per euro. The hedge fund will pay 0.3% annual interest rate to borrow in pounds with a bank in London. It will receive 1.2% annual interest in a bank in Paris to invest in euro. (Hint: Take the interest rate times 30/360, or approximately 0.083333333, to find the 30-day interest rate.) At the beginning of an investment period, a hedge fund converts $10,000,000 of its own money into 8,849,558 euro. It borrows 100,000,000 pounds and converts them into 116,814,242 euro. It then invests 125,663,800 (8,849,558 + 116,814,242) euro at 0.1% (1.2% / 12 months), ending with

125,789,464 euro. The hedge fund then repays its loan in pounds. It will need 100,025,000 pounds (100,000,000 1.00025), where 1.00025 = 1 + 0.003/12. Of the fund's remaining euro, it will use 116,843,446 euro to repay the pounds borrowed. Given current exchange rates, how many dollars in profit does the hedge fund earn in this case if exchange rates remain the same?

1. $109,000, a profit of 1.09000%
2. $10,109,000, a profit of 101.0900% C.

$96,464, a profit of 0.96464%

d. $127,327, a profit of 1.27327%