The Brennon Group is a U.S. hedge fund that wants to benefit from the interest rate...

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The Brennon Group is a U.S. hedge fund that wants to benefit from the interest rate differential between the euro area and Japan. A euro (€) costs $1.18 today. while a yen (*) costs $0.0091 today. The fund expects the exchange rates to still be $1.18 per euro and $0.0091 per yen in 12 months. Current annual interest rates are as follows: Currency Euro Yen Borrowing rate 7.5% 4.5% Lending rate 6.5% 4.1% The fund 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. Attempt 1/10 for 10 pts. What is the expected profit from the trade after 12 months (in S)? The Brennon Group is a U.S. hedge fund that wants to benefit from the interest rate differential between the euro area and Japan. A euro (€) costs $1.18 today. while a yen (*) costs $0.0091 today. The fund expects the exchange rates to still be $1.18 per euro and $0.0091 per yen in 12 months. Current annual interest rates are as follows: Currency Euro Yen Borrowing rate 7.5% 4.5% Lending rate 6.5% 4.1% The fund 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. Attempt 1/10 for 10 pts. What is the expected profit from the trade after 12 months (in S)?

Answer rating: 100% (QA)

SOLUTION To calculate the expected profit from the trade after 12 months we need to consider the interest rate differentials and the exchange rate mov... View the full answer