Reference no: EM131933818

A currency dealer has good credit and can borrow either $500,000 or €400,000 for one year. The one year interest rate in the U.S. is i$=2% and in the euro zone the one year interest rate is i€=6%. The spot exchange rate is $1.25=€1.00 and the one year forward exchange rate is $1.20=€1.00 a) Describe how one determines which currency to borrow in. Show a calculation of 2 items to be compared. b) Identify in this case which currency is the borrowing currency and which is the lending (“investing”) currency. c) What is the amount of the investing currency obtained through borrowing & conversion? d) Identify in words 4 actions you would take today. e) If you want to keep your profits in $, how much of the investing currency is converted to the borrowing currency? f) State the $ profit. g) If you want your profit to be in €, how much of the investing currency is converted to the borrowing currency? h) State the € profit. I) Identify two actions you would take at the maturity date of the contract.