Intro

Pacific Investment Bank is a U.S. investment bank that wants to speculate on the dollar-euro exchange rate. A euro () costs $1.13 today. The bank expects it to cost $1.18 in 6 months. Current annual interest rates are as follows:

Currency	Borrowing rate	Lending rate
Euro	4.5%	4.4%
U.S. dollar	7.2%	6.5%

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

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 euros?

Euros

Dollars

Part 2

What is the initial value of the foreign currency after conversion (in euro)?

Part 3

What is the foreign currency value after investing it for 6 months (in euro)?

Part 4

What is the expected value of the investment after investing it for 6 months and converting it back to the home currency (in dollars)?

Part 5

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

Part 6

What is the expected profit from the trade after paying off the loan and interest (in $)?