o. Assume all the preceding information with this exception: Chase Bank expects

Question

o. Assume all the preceding information with this exception: Chase Bank expects the peso to appreciate from its present capitalize generated from this strategy. spot rate of $.15 to $.17 in 30 days. How could it attempt to on its expectations without using deposited funds? Estimate the profits that could be HINT: Follow these steps: 1. Borrow $10 million and convert the $10 million to pesos (MXP): nd the pesos through the interbank market at 8.5% annualized over a 30-day period. The amount accumulated in 30 days is: 3. Le 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 30 days (based on the expected spot rate of $.17) is: 5. 6.The profits are determined by estimating the dollars available after repaying the loan

Explanation / Answer

Hi,

Let's follow the steps one by one

First the spot rate now is 1 peso = $0.15

after 30 days 1 Peso = $0.17

A) Borrow $10 million and convert to peso = 10,000,000/0.15 = 66,666,667 Peso

B) Lend at 8.5% for 30 days, therefore the rat eis 0.085/12 = 0.00708

Final Value = Pv (1+r)^t = 66,666,667 * (1.00708)^1 = 67,138,889

C) Assuming we pay an 8.5% interest on dollar loan =10,000,000*(1.00708) =10,070,800

D) Dollar amount to be received = 67,138,889 * 0.17 = $ 11,413,611

E) A,ount remaining after paying the loan = 11413611-10070800 = $ 1,342,811

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