Question
Need Help Solving part 5! Please show all the needed work Thank you! Given interest rates: Deposit rate: 0.40% in & 1.0% in Borrow rate:
Need Help Solving part 5! Please show all the needed work Thank you!
- Given interest rates:
- Deposit rate: 0.40% in & 1.0% in
- Borrow rate: 0.50% in & 1.1% in
- Investment Plan:
- You use your own funds: $100
- You can borrow additional funds either 250 or 200
- Spot rates:
- EUR/USD = 1.2 & GBP/USD = 1.5
- Expectation:
- USD is expected to depreciate by 2.5% against EUR in 1 month.
- USD is expected to appreciate by 1.5% against GBP in 1 month.
- Exchange rate in 1 month (1.8 points)
- EUR/USD = $1.2308
$1.20/ (1-2.5%) = 1.2308
- USD/EUR = 0.8125
1 / (EUR/USD) 1/ $1.2308 = 0.8125
- GBP/USD = $1.4778
$1.50/ (1 + 1.5%)
= $(1.5/ 1.015)
= $1.4778
- USD/GBP = 0.6768
1/ (GBP/USD) 1/$1.4778= 0.6767
- GBP/EUR = 1.2012
(GBP/USD) x (USD/EUR)
=$1.4778 / .1.2308
=1.2007
- EUR/GBP = .8328
1/ (GBP/EUR). 1/ 1.2012 = .8328
Or you can multiply to get the same answer
- Cross rates (2 point)
- GBP (appreciates/depreciates) against EUR by -3.94%
(1.2007-1.25) / 1.25= -3.94%
- EUR (appreciates/depreciates) against GBP by 4.10%
(.8328-.80) / .80= 4.10%
- Where to borrow? (1point)
| Borrow today | Payoff after 1 month | Payoff after 1 month in |
250 | 251.25 | 251.25 | |
200 | 202.2 | 242.7662 |
So, it is cheaper to borrow from GBP
- Where to invest? (1point)
| Investing today | Withdraw after 1 month | Withdraw after 1 month in |
250 | 251 | 251 | |
200 | 202 | 242.53 |
So, it is better to invest in EUR
- Today (2points)
- Change:
$100 to __ __________________
- Borrow & Convert:
Borrow ____________ with _________ borrowing rate and then change __ to __
__________________
__________________
- Deposit:
Deposit with __________________
Total deposit: __________________
- After 1 month (2points)
- Receive (or withdraw):
__________________
- Repayment:
Total payment in ____: ____________________________________
Total payment in ____: ____________________________________
After payment in ____: ____________________________________
- Convert: __________________
- Profit/Loss: __________________ (0.2 points)
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