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(c) Assume the spot exchange rates between Bangladesh Taka (BDT) and US Dollar (USD) is 80:1 and 2 year interest rates in Bangladesh and the
(c) Assume the spot exchange rates between Bangladesh Taka (BDT) and US Dollar (USD) is 80:1 and 2 year interest rates in Bangladesh and the US are 9% and 7% respectively. Also assume that you have the borrowing capacity of USD 4,000 or equivalent BDT. Required: (1) Based on the above information, calculate the 2 years forward exchange rate of BDT per USD. If the 2 year forward exchange rate in the market turns to be BDT 81.2 per USD, how much can you profit from arbitraging? How would your strategy change if the forward exchange rate turns to be BDT 77.50 per USD? How much would be the profit from arbitraging if your borrowing capacity remains same? [Marks: (3+3+9) = 15)
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