Reference no: EM132564836

A Treasury manager at Barclays Bank can borrow for 3 months at 10.15% and make a 3 month loan at 10.25%. Capital markets regulation requires that a 3 million shillings borrowing has to be supported by 35,000 shillings of capital. (a) Exploiting the arbitrage spread by passive management through borrowing for 3 months and lending for 3 months; (i) Calculate the borrowing cost. (ii) Determine the income from the lending. (iii) Compute the implied profit and the rate of return. (b) The Treasury manager aspires to pursue a strategy of positive gaping based on the expectation that interest rates will increase by 1 percentage after 1 month; (i) Calculate the borrowing cost. (ii) Determine the income from the lending. (iii) Compute the implied profit and the rate of return.