Paul George International Bank is a U.S. bank that wants to speculate on the dollar-euro exchange rate.
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Question:
Paul George International Bank is a U.S. bank that wants to speculate on the dollar-euro exchange rate. A euro () costs $1.2 today. The bank expects it to cost $1.28 in 6 months. Current annual interest rates are as follows:
Currency | Borrowing rate | Lending rate |
Euro | 4.5% | 4.4% |
U.S. dollar | 7.1% | 6.9% |
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.
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