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f55 Ch2 inclass 3 (1)

# f55 Ch2 inclass 3 (1) - Which currency should you invest in...

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Solution: In-Class Excercise # 3: Currency Price Expectations and Trading Strategy Citibank can borrow/lend dollars at 6%. It can also borrow/lend euros (E) and pounds (BP) at 8%. It has access to \$15,000,000, E20,00,000, or BP10,000,000 for currency speculation How can Citibank make trading profits: Scenario 1: If it expects BP to depreciate from \$1.50 to \$1.40 in 180 days. Scenario 2: If it expects E to appreciate from \$0.75 to \$0.80 in 90 days. Scenario 1 Scenario 2 Which currency should you borrow in, and how much ? Depreciating currency: Borrow BP 10,000,000 @ 8% for 180 days (6 months) Depreciating currency: Borrow USD 15,000,000 @ 6% for 90 days (3 months)
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Unformatted text preview: Which currency should you invest in, and how much ? Appreciating currency: Invest USD: BP 10,000,000 *1.5 = \$15,000,000 @ 6% for 180 days (6 months) Appreciating currency: Invest E: \$15,000,000 / 0.75 = E 20,000,000 @ 8% for 90 days (3 months) What will be your profit in \$ or FC [15,000,000 (1 + 0.06/2) ]/1.40 -10,000,000 (1 + 0.08/2) 11,035,714 - 10,4000,000 = BP 635,714 [20,000,000 (1 + 0.08/4) ]*0.80 -15,000,000 (1 + 0.06/4) 16,320,000 - 15,225,000 = USD 1,095,000 Which graph best describes what happens in the FX market BP Demand No Change + BP Supply Increase: Graph E E Demand Increase + E Supply No Change: Graph G...
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