Question: Lever - Up Hedge Fund ( LUHF ) can borrow 1 million ( euros ) at an annualized rate of 4 . 2 0

Lever

-

Up Hedge Fund

(

LUHF

)

can borrow

€ 1

million

(

euros

)

at an annualized rate of

4.20 %

or $

1

million dollars at an annualized rate of

4.50 % .

LUHF can invest euros in a

90 -

day German certificate of deposit

(

.

.)

and earn an annualized interest rate of

3.80 %

or it can invest dollars in a

90 -

day C

.

.

in the U

.

.

and earn an annualized interest rate of

4.00 % .

The current spot rate of the euro is $

1.13 .

LUHF believes that, sometime in the next

90

days, the U

.

.

government will announce that it will be imposing heavy tariffs and strict quotas on imports from Europe. LUHF believes that this change in U

.

.

government policy will be largely unanticipated by market participants, so that the event will cause the spot rate of the euro to decline significantly. LUHF believes that the spot rate of the euro will be $

1.09

90

days. If LUHF pursues a speculation strategy to capitalize on the depreciation of the euro, determine LUHF's profit or loss

(

in dollars

)

from this speculation if the spot rate of the euro is indeed $

1.09

90

days. Assume

360

days in a year.

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