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Calculate the profits that could be earned

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HSBC Bank expects that the Australian dollar will depreciate against the U.S dollar from its spot rate of $0.77 to $0.75 in 120 days. The following interbank lending and borrowing rates exist:

Currency - U.S dollar
Lending Rate (per annum) - 5%
Borrowing Rate (per annum) - 5.5%

Currency - Australian dollar
Lending Rate (per annum) - 10%
Borrowing Rate (per annum) - 14%

HSBC Bank considers borrowing AUD10,000,000 in the interbank market and investing the funds in U.S. dollars for 120 days. Calculate the profits (or losses) that could be earned from this strategy. Should HSBC Bank pursue this strategy?

Reference no: EM132999398

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