1.

The spot rate of £: $1.73

The expected spot rate one year from now is $1.66

Percentage depreciation:
(𝟏.𝟔𝟔−𝟏.𝟕𝟑)
= -0.0404 or - 4.04%
𝟏.𝟕𝟑

20.

Borrow in MXN for 10 days

Convert MXN into USD

Lend in USD for 10 days

a.

BD Bank will borrow MXN 70,000,000 [annual borrowing rate is 8.7%]

The obligation after 10 days:

MXN 70,000,000 * [ 1+ (10/360) *.087] [I am assuming there are 360 days in a year; numbers are slightly
different if we use 365 instead]

MXN 70,000,000 + MXN 169,166.66 = MXN 70,169,167

MXN 70,000,000 will be converted into USD

After conversion, the bank will get = 70,000,000*$.15

= $ 10,500,000

$ 10,500,000 will be invested for 10 days [annual lending rate is 8.0%]

The future value of the investment:

$ 10,500,000 [ 1+ (10/360) *.080] = $10,500,000 + $ 23,333.33 = $ 10,523,333

In the final step, the bank will convert USD back into MXN at $.14: 10,523,333/.14 = MXN 75,166,667

Profit from the strategy = MXN 75,166,667 - MXN 70,169,167 = MXN 4,997,500

b.

BD Bank will borrow $10,000,000 [annual borrowing rate is 8.3%]

The obligation after 30 days:

$10,000,000 * [ 1+ (30/360) *.083] [I am assuming there are 360 days in a year; numbers are slightly
different if we use 365 instead]

$10,000,000 + $ 69,166.66 = $10,069,167

$10,000,000 will be converted into MXN

After conversion, the bank will get = 10,000,000/ .15

= MXN 66,666,666.66

MXN 66,666,666.66 will be invested for 30 days [annual lending rate is 8.5%]

The future value of the investment:

MXN 66,666,666.66 [ 1+ (30/360) *.085] = MXN 66,666,666.66 + MXN 472,222.22= MXN 67,138,888.88

In the final step, the bank will convert MXN back into USD at $.17:

67,138,888.88*.17 = $11,413,611.11

Profit from the strategy = $11,413,611.11- $10,069,167= $1,344,444.11

21.

Borrow in S$

Convert S$ into $

Invest/lend in $

The bank will borrow S$10,000,000

The obligation after 60 days = S$ 10,000,000 * [ 1+ (60/360) *.24] = S$ 10,400,000 [assuming 360 days in
a year]

The bank will convert S$ into $

10,000,000* $.43 = $4,300,000

$4,300,000 will be invested/lent for 60 days

The future value of the investment after 60 days = $ 4,300,000 * [ 1+ (60/360) *.07] = $4,350,167

The bank will convert USD back into SGD

4,350,166.666/.42 = S$10,357,539

It’s a loss! Why? The interest rate differential is too unfavourable.

Profit = S$10,357,539 - S$ 10,400,000 = - S$42,461