Horizon Capital expects that the Euro () will depreciate against the dollar from its spot rate of $0.15 to $0.14 in days. The following interbank lending and borrowing rates exist:

Lending rate Borrowing rate

U.S. $ 8.0% 8.3%

Euro 8.5% 8.7%

Assume that Horizon Capital has a borrowing capacity of either $10,000,000 or 70,000,000 in the interbank market, depending on which currency it wants to borrow.

(a) Using the information above, show how Horizon Capital can capitalize on its expectations without using deposited funds. Estimate the profits that could be realized from this strategy.

(b) Based on the same information, but now assume that Horizon Capital expects the Euro to appreciate from its present spot rate of $0.15 to $0.17 in 30 days. How could the bank attempt to capitalize on its expectations without using deposited funds? Estimate the profits that could be realized from this strategy.