Question

Assume that you are a retail customer. Lending Borrowing is 4.20% APR ie 3.65% APR Ask Bid 4.10% APR 3.50% APR So($/€ $1.40 = €1.00 F360($/€)| $1.44 €1.00 $1.43 1.00 $1.49e1.00 If you borrowed 1,000,000 for one year, how much money would you owe at maturity in euro?

Answer 1

We have 2 options

1. Borrow €1,000,000 in Euro market for 3.65% and pay €10,36,500 at the end of one year.

Or

1. Borrow $14,30,000 and convert it into €10,00,000

And borrow it for 4.2%

At the end of one year we pay €(14,30,000*1.042)/1.44 (Note1)

That is €10,34,763.88

So option 2 is better.

At the end of maturity we pay €10,34,763.88

Note1: we multipled it by borrowing rate of 4.2%

And divided by selling rate of Euro after 1 year 1.44

Thank you. Hope you find it helpful.