Question

Assume that you are a retail customer (i.e., you buy at the ask and sell at the bid). Use the information below to answer the following questions.

		Bid								Ask										APR
S0($/€)		$	1.42		=	€	1.00			$	1.45		=	€	1.00			i$			4	%
F360($/€)		$	1.48		=	€	1.00			$	1.50		=	€	1.00			i€			3	%

1. If you borrowed $1,000,000 for one year, how much money would you owe at maturity?
2. If you had borrowed $1,000,000 and traded for euro at the spot rate, how many € would you receive?

3. If you had €1,000,000 and traded it for USD at the spot rate, how many USD would you get?

Please show how you arrived at the answers.

Answer 1

Solution 1
Borrowed amount	$        1,000,000
APR	4%
Amount owe at maturity	Borrowed amount * (1+APR)
Amount owe at maturity	1000000*(1+4%)
Amount owe at maturity	$        1,040,000
Solution 2
Borrowed amount	$        1,000,000
Spot rate buying EURO	€                 1.00	$      1.45
EURO received=	1000000/1.45
EURO received=	€     689,655.17
Solution 3
Amount availble	€        1,000,000
Spot rate selling EURO	€                 1.00	$      1.42
EURO received=	1000000*1.42
EURO received=	$        1,420,000