Question
Blueberry Financial Corp. (a U.S. firm) expects the Ethiopian Birr to appreciate against the U.S. Dollar over the next 30 days. The current spot rate
Blueberry Financial Corp. (a U.S. firm) expects the Ethiopian Birr to appreciate against the U.S. Dollar over the next 30 days. The current spot rate is $1 = 47.1834 Ethiopian Birr. Blueberry expects the spot rate to appreciate $1= 42.3622 in 30 days.
Short-term annual rates in the interbank market are as follows:
| Lending Rates | Borrowing Rates |
U.S. Dollars ($) | 3.21% | 3.67% |
Ethiopian Birr | 5.25% | 6.07% |
Blueberry Financial does not want to use any of its own capital and goes to the money markets to borrow funds for 30 days. Blueberry will borrow $22,000,000, convert U.S. Dollars to Birr at the prevailing spot rate, and invest in a 30-day Certificate of Deposit in Ethiopia.
1) How many Birrs will the proceeds from the 30-day loan convert into?
2) What is the value of the maturity value of the 30-day investment in Birr?
3) Assuming that the spot rate is $1= 42.3622 Birr, in 30 days, how many U.S. Dollars will the proceeds from the 30-Day CD in Ethiopia convert into?
4) How much is Blueberrys profit/loss?
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