Suppose you have $1000 that serves as margin for a $9000 one year loan where

the interest rate is 1%. You invest the total = $10,000 in Europe where the

exchange rate is $1.25 $/. The one year interest rate in Europe is 4%.

Consider the following two scenarios:

Scenario #1: The $/ exchange rate remains constant over the holding period = 1

year

Scenario #2: The exchange rate after one year is 1.3 $/

b. (10 points) Assuming scenario #1, what is your profit / loss and your rate

of return in $ when you close your position? Show your work and explain your answer.

c. (10 points) Assuming scenario #2, what is your profit / loss and your rate

of return in $ when you close your position? Show your work and explain your answer.