American Express Bank (AEB) expects that the Mexican peso will appreciate against the dollar

from its spot rate of $ 0.18 to $ 0.22 in 25 days. The following inter-bank lending and borrowing

rate exist:

Lending Rate Borrowing Rate

U.S. doller 6.0% 6.5%

Mexican Peso 6.8% 7.0%

Assume that AEB has a borrowing capacity of either $9 million or 68 million pesos in the

interbank market, depending on which currency it wants to borrow.

Requirements:

(i) Estimate the profits/losses that could be generated from each of strategy.

(ii) Comment on how could AEB attempt to capitalize on its expectations without using

deposited funds?