Assume all the Bank expects the peso to b. preceding information with this excep

Question

Assume all the Bank expects the peso to b. preceding information with this exception: Chase appreciate from its present spot rate of $.15 to $.17 in 30 days capitalize on its expectations without using deposited generated from this strategy funds? Estimate the profits that could be strategy. HINT: Follow these steps: 1. Borrow $10 million and convert the $10 million to pesos ( MXP) Lend thepesos through the interbank market at 8.5% annualized over a 30-day period. The amount accumulated in 30 days is: 3 4. Repay the dollar loan. The repayment amount on the dollar loan is: Convert the pesos to dollars to repay the loan. The amount of dollars to be received in 0 days (based on the expected spot rate of$17) is: 5. The prolis ane determined by estimating the dollas available after repaying the loan:

Explanation / Answer

Step 1 : Borrow $10 million and convert to MXP @ current exchang rate

MXP 1 = $0.15

Amount borrowed (in MXP) = $10,000,000 x MXP 1 / 0.15 = MXP 66,666,666.6666

Step 2: Invest the above amount @8.5% for 30 days

Assuming 365 days in a year we have -

Amount accumulated = Principal + Interest = MXP 66,666,666.6666 + [ MXP 66,666,666.6666 x 8.5% x 30 / 365 ] = MXP 67,132,420.0912

Step 3 : Repay the dollar loan

Amount to be repaid = $10,000,000 + [ $10,000,000 x 8.5% x 30 / 365 ] = $10,069,863.0136

Step 4 : Covert amount received in MXP to Dollars

MXP 1 = $0.17

Amount received or accumulated (in dollars) = MXP 67,132,420.0912 x $0.17 / MXP = $11,412,511.4155

Step 5: Profit or Loss

Profit = Amount accumulated - Amount to be repaid = $11,412,511.4155 - $10,069,863.0136 = $1,342,648.4019 or $1,342,648.40

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