Strategy to capitalize on expected exchange rate movement

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Reference no: EM132004369

Assume the following information:

-Interest rate on borrowed euros is 5 percent annualized

-Interest rate on dollars loaned out is 6 percent annualized

-Spot rate is €1.10 per dollar (€=$0.909)

-Expexted sport rate in five days is €1.15 per dollar

-Fabrizio Bank can borrow 10 million euros

As part of a strategy to capitalize on the expected exchange rate movement, the bank could ___ euros and ___ dollars.

A. Loan out; borrow

B. Loan out; loan out

C. Borrow; borrow

D. Borrow; loan out

E. None of these is correct

If the bank attempts to capitalize on the above information, its profit over the 5 day period is ___.

A. €455,266.81

B. €452,426.04

C. €2,653,597.22

D. None of these is correct

Reference no: EM132004369

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