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XYZ Bank is a US based bank and wants to borrow money either in Canadian Dollars or US Dollars depending on the following table. XYZ

XYZ Bank is a US based bank and wants to borrow money either in Canadian Dollars or US Dollars depending on the following table. XYZ can borrow up to $10 million (US Dollars) or C$13 million (Canadian Dollars). Interbank borrowing and lending rates are given as follows:

CURRENCY

LENDING RATE

BORROWING RATE

U.S. Dollar

8.0%

8.3%

Canadian Dollar

8.5%

8.7%

a. XYX Bank expects spot rate of Canadian Dollars to depreciate from $0.89 to $0.87 in 10 days. If XYZ Bank’s expectations are correct, how can they take advantage of interbank interest rates without using the bank’s own deposited funds? Explain the steps and calculate the estimated profit for speculative strategy.

b. XYX Bank expects spot rate of Canadian Dollars to appreciate from $0.89 to $0.91 in 30 days. If XYZ Bank’s expectations are correct, how can they take advantage of interbank interest rates without using the bank’s own deposited funds? Explain the steps and calculate the estimated profit for speculative strategy.

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