What is the value of the borrowed amount in euro

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Question - New York Greater Bank is a U.S. investment bank that wants to benefit from the interest rate differential between the euro area and Japan. A euro (€) costs $1.09 today, while a yen (¥) costs $0.0094 today. The fund expects the exchange rates to still be $1.09 per euro and $0.0094 per yen in 6 months. Current annual interest rates are as follows:

Currency

Borrowing rate

Lending rate

Euro

7.5%

6.8%

Yen

4.6%

4.1%

The bank doesn't want to invest any of its own money, but can borrow €10,000,000 or ¥1,000,000,000.

Assume there are 30 days in every month and 360 days per year. Ignore compounding when working with the interest rates.

Required -

(a) What is the value of the borrowed amount in euro?

(b) What is the value of the invested amount after 6 months (in euro)?

Reference no: EM132845385

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