Question
Assume the following information regarding U.S. and European annualized interest rates: Currency Lending Rate Borrowing Rate U.S. Dollar ($) 6.73% 7.20% Euro () 6.80% 7.28%
Assume the following information regarding U.S. and European annualized interest rates:
Currency | Lending Rate | Borrowing Rate |
U.S. Dollar ($) | 6.73% | 7.20% |
Euro () | 6.80% | 7.28% |
PNC bank can borrow 20 million. The current spot rate of the euro is $1.13. Furthermore, PNC bank expects the spot rate of the euro to be $1.10 in 90 days. What is PNC bank's dollar profit from speculating if the spot rate of the euro is indeed $1.10 in 90 days? (24 points)
Show the following six intermediate steps to your solution and explain each step.
1. Borrow:
2. Convert:
3. Invest the amount at an annualized rate for 90 days:
4. Determine the amount owed:
5. Determine the amount needed to repay the loan:
6. The profit is:
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