Blue Diamond Bank expects that the Chinese currency (the yuan) will depreciate against

the dollar from its spot rate of $0.15 to $0.13 in 90 days. The following interbank lending

and borrowing rates exists:

U.S. dollar

Chinese yuan

Lending Rate

8.0%

8.5%

Borrowing Rate

9.0%

9.6%

Assume that Blue Diamond Bank has a borrowing capacity of either $10 million or 70

million yuan in the interbank market, depending on the currency it wishes to borrow.

Assume a 360 day year.

1. How could Bluc Diamond Bank attempt to capitalize on its expectations without using

deposited funds? Estimale the profit that could be generated from this strategy.

b. If Blue Dinmond Bank expects the yuan to apprecinte from its present spot rate of

$0.15 to $0.17 in 90 days, how could it capitalize on its expectations without using

deposit funds? Estimate the profits that could be generated from this strategy.