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You excute a carry trade in which you borrow 10,000 British pounds and invest in euros. You also use 10,000 of your own money. The duration of the trade is one year. The interest rates and exchange rates are shown in the following:
Pound interest rate: 4%
Euro interest rate: 6%
Current spot rate: $1.10=1 euro and 1.20 euro=1 british pound
You expect the euro to appreciate in value against the pound by 10% but the exchange rate between the euro and the dollar to remain the same by the end of the year.
What is your expected profit as a percentage of your own fund?
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