Assume the following information regarding U.S. and Canadian annualized interest

Question

Assume the following information regarding U.S. and Canadian annualized interest rates: Piggy Bank can borrow either $20 million or C$30 million. Furthermore, Piggy Bank expects the spot rate of the Canadian dollar to be $0.82 in 60 days (the current spot rate is $0.80). Malone Bank also plans to speculate on the Canadian dollar's currency movements, but it expects the Canadian spot rate 60 days from now to be $0.78. Based on this information, what amount will the borrowed amount convert to today?

Explanation / Answer

The borrowed amount will convert to the following amount today:

Converted Amount = Borrowed Amount*Current Spot Rate

Substituting the values in the above formula, we get,

Converted Amount = C$30,000,000*.80 = $24,000,000 (answer)

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