Sapling Independent is a small bank located in Hong Kong. Sapling Independent is

Question

Sapling Independent is a small bank located in Hong Kong. Sapling Independent is interested in increasing the number of mortgages it writes, but it is constrained by how many deposits it has. It has decided to borrow 12,000,000 euros from a large German bank for one year. The German bank is going to charge Sapling Independent an interest rate 1.500% per year. The German bank insists on being repaid in euros. After Sapling Independent borrows the money, it is going to have to convert the money into Hong Kong dollars at an exchange rate of 13.000 HK dollars/euro. Then Sapling Independent is going to lend all the money at an interest rate of 6.000% per year. At the end of one year, all the money that Sapling Independent lent will be repaid, plus interest. Finally, at the end of one year, Sapling Learning is going to have to repay its loan to the German bank in euros. At the end of the year, the exchange rate is 11.500 HK dollars/euro. What is Sapling Independent's profit from this series of transactions in Hong Kong dollars?

Explanation / Answer

Loan amount taken by sapling = 12,000,000 euros

Loan amount taken by sapling in Dollars at an exchange rate of 13 HK dollars/euros = 13* 12,000,000 =156,000,000 HK

Amount to be repaid by sapling at i = 1.5% = 12,000,000(1+0.015) = 12,180,000 euros

Amount to be repaid by sapling in HK Dollars at an exchange rate of 11.50 HK dollars/euro = 11.5*12,180,000 = 140,070,000 HK

Amount earned by lending at i = 6% = 156,000,000(1+0.06) HK = 165,360,000 HK

Net profit earned = Amount Earned - Amount Repaid = 165,360,000 HK - 140,070,000 HK = 25,290,000 HK

Net profit earned in Euros = 2,199,130.45 euros

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.