A hedge fund wants to take advantage of current interest rates. It projects that the pound-to-dollar and euro-to-dollar exchange rates will remain the same one month from now in the worst-case scenario, though it actually expects the euro to appreciate against the other two currencies. The current exchange rates are $1.1500 per euro, $1.3500 per pound, and 0.85185 pounds per euro. The hedge fund will pay 0.3% annual interest rate to borrow in pounds with a bank in London. It will receive 1.8% annual interest in the France to invest in euro. (Hint: Take the interest rate times 30/360, or approximately 0.083333333, to find the 30-day interest rate.) At the beginning of an investment period, a hedge fund converts $1,000,000 of its own money into 869,595 euro. It borrows 10,000,000 pounds and converts them into 11,739,156 euro. It then invests 12,608,751 (869,595 + 11,739,156) euro at 0.15% (1.8% / 12 months), ending with 12,627,664. The hedge fund then repays its loan in pounds. It will need 10,002,500 pounds (10,000,000 x 1.00025), where 1.00025 = 1 + 0.003/12. Of the fund's remaining euro, it will use 11,742,091 euro to repay the pounds borrowed. Given current exchange rates, how many dollars in profit does the hedge fund earn in this case? 

Answer rating: 100% (QA)

To calculate the profit earned by the hedge fund we need to consider the initial investment interest ... View the full answer