Take advantage of high domestic interest rates

Reference no: EM13835188

A US based speculator wanted to take advantage of high domestic interest rates in ABC-Land. One month ABC-Land treasuries offered 40% pa interest while speculator's US dollar cost was only 20%pa. Speculator bought $10,000,000 equivalent of one-month maturity ABC-Land treasuries when the exchange rate was at ABCL687. Speculator expected a slight depreciation to ABCL690 since ABC-Land was under a crawling peg exchange rate regime. However, a political crisis led ABC-Land to abandon the crawling peg and currency was floated. At the maturity of treasury (in one month) ABCLand Lira was trading at ABCL1,200/USD. Calculate the loss of the speculator?

Reference no: EM13835188

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