Trudo Co. is a U.S. firm that executes a carry trade in which it borrows from the country which offers low interest rates and invests in the country where interest rates are presently high. Trudo uses $200,000 of its own funds and borrow an additional $390,000 equivalent from either European or British bank. Assuming borrowing rates and deposits rates are equal, the European bank offers 1.25 percent interest rates while British bank offers 0.75 percent interest rates over one month respectively. The euro’s spot rate is $1.475, and that the British pound’s spot rate is $1.70. 

Suppose the euro depreciated by 3 percent over the month against dollar, while British pound depreciated by 0.5 percent over the month against dollar, what is Trudo’s expected profit or loss?

Answer rating: 100% (QA)

Given Information Own Fund 200000 USD Borrowing in Equivalent USD 390000 USD European Ban... View the full answer