Kurnick Co. expects that the pound will depreciate from $1.70 to $1.68 in one ye

Question

Kurnick Co. expects that the pound will depreciate from $1.70 to $1.68 in one year. It has no money to invest, but it could borrow money to invest. A bank allows it to borrow either 1 million dollars or 1 million pounds for one year. It can borrow dollars at 6 percent or British pounds at 5 percent for 1 year. It can invest in a risk-free dollar deposit at 5 percent for 1 year or a risk free British deposit at 4 percent for 1 year. Determine the expected profit or loss (in dollars) if Kurnick Co. pursues a strategy to capitalize on the expected depreciation of the pound.

Explanation / Answer

if they take 1 million pounds.. money to be returned to bank= (1+ .05) million pound current dollar price= 1.05 x 1.68 = 1.764 million $ money earned = (1+.04) million pound initial amount = 1 x 1.7 million $ now = 1.04 x1.68 =1.747 loss = 0.0168 million $ PLEASE RATE

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