New York Greater Bank is a U.S. investment bank that wants to benefit from the interest rate differential between the euro area and Japan. A euro (€) costs $1.09 today, while a yen (¥) costs $0.0094 today. The fund expects the exchange rates to still be $1.09 per euro and $0.0094 per yen in 6 months.

 Current annual interest rates are as follows:

Currency                       Borrowing rate                    Lending rate

Euro                                     7.5%                                      6.8%

Yen                                        4.6%                                    4.1%

The bank doesn't want to invest any of its own money, but can borrow €10,000,000 or ¥1,000,000,000.

Assume there are 30 days in every month and 360 days per year. Ignore compounding when working with the interest rates.

(a) What is the value of the borrowed amount in euro?

(b) What is the value of the invested amount after 6 months (in euro)?

Answer rating: 100% (QA)

a To determine the value of the borrowed amount in euros we need to convert the yen amount to euros ... View the full answer