Intro

Green Charter Bank is a U.S. money center bank that wants to speculate on the dollar-yen exchange rate. A yen () costs $0.009 today. The bank expects it to cost $0.0084 in 12 months. Current annual interest rates are as follows:

Currency	Borrowing rate	Lending rate
Yen	4.8%	4%
U.S. dollar	7.2%	6.7%

The bank doesn't want to use any of its own money, but could borrow either $10,000,000 or 1,000,000,000.

Assume there are 30 days in every month and 360 days per year. Ignore compounding when working with the interest rates.

Part 1

Should the bank borrow dollars or yen?

Dollars

Yen

.

Part 2

What is the initial value of the loan after conversion (in $)?

Part 3

What is the value after investing the amount from the previous part for 12 months (in $)?

Part 4

What amount is necessary to pay back the loan with interest (in yen)?

Part 5

What amount of home currency is expected to be needed to pay back the loan with interest (in $)?

Part 6

What is the expected profit from the trade (in $)?