Hampton Investment Co. is a U.S. firm that executes a carry trade in which it borrows euros (where interest rates are presently low) and invests in British pounds (where interest rates are presently high).

Hampton uses $100,000 of its own funds and borrows an additional 600,000 euros and convert to British Pounds.

It will pay 0.5% interest on euros borrowed for the next month and will earn 1.0 % on funds invested in British pounds.

Assume that the euros spot rate is $1.20 and that the British pounds spot rate is $1.80. The pound is worth 1.5 euros at this time.

Hampton uses todays spot rate as its best guess of the spot rate one month from now.

Calculate Hamptons expected profits from its carry trade. Fill the answers for questions A to J

At Beginning of Investment Period

A. Hampton invests $100,000 of its own funds into British pounds: Convert to British pounds

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B. Hampton borrows 600,000 euros - convert them into British pounds:

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C. Hamptons total investment in pounds (A+B):

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At the End of Investment Period

D. Hampton's receipt from investment (amount from C + interest 1%):

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E. Hampton's repayment of loan (600,000 Euros) with interest (0.5%):

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F. Amount of pounds Hampton needs to repay loan in euros (Convert E into Pounds):

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G. Amount of pounds Hampton has after repaying loan (D-F):

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H. Hampton converts pounds held into U.S. dollars (Convert G into $):

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I. Hamptons profit (H-$100,000):

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J. The above profit of Hampton as a percentage of its own funds used in this carry trade strategy over a one-month period is therefore I/$100,000

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