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II. The following annualized interbank interest rates are available. Currency. Lending Rate Borrowing Rate U.S. Dollar ($) 6.73% 7.20% Euro () 6.80% 7.28% PNC bank
II. The following annualized interbank interest rates are available. Currency. Lending Rate Borrowing Rate U.S. Dollar ($) 6.73% 7.20% Euro () 6.80% 7.28% PNC bank can borrow either 20 million or $20 million. The current spot rate of the euro is $1.13. Furthermore, PNC bank expects the spot rate of the euro to be $1.10 in 90 days. What is PNC bank's dollar profit from speculating if the spot rate of the euro is indeed $1.10 in 90 days? Show the following six intermediate steps to your solution and explain each step. (18 points) Feel free to write this out on paper, in a word document or an excel file for each step and upload the document as your answer. (1) Which currency to borrow and why? (2) Convert: (3) Invest the amount at an annualized rate for 90 days: (4) Determine the amount owed in borrowing currency: (5) Determine the amount needed to repay the loan based on the expected exchange rate: (6) The profit is
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