Speculation. Blue Demon Bank expects that the Mexican peso will depreciate against the dollar from its spot rate of $0.048 to $0.043 in 30 days. The following interbank lending and borrowing nominal annualized rates exist:

LendingRate BorrowingRate

U.S. dollar1.0% per yr1.2% per yr

Mexican peso5.2% per yr5.6% per yr

Assume that Blue Demon Bank has a borrowing capacity of either $10 million or 200 million pesos in the interbank market, depending on which currency it wants to borrow.

a.How could Blue Demon Bank attempt to capitalize on its expectations without using deposited funds? Estimate the profits that could be generated from this strategy.

b.Assume all the preceding information with this exception: Blue Demon Bank expects the peso to appreciate from its present spot rate of $0.048 to $0.051 in 90 days. How could it attempt to capitalize on its expectations without using deposited funds? Estimate the profits that could be generated from this strategy.