Question 23 DK Investment Co is a US firm that executes a carry trade in which it borrow euros (where interest rates are presently low) and invests in British pounds (where interest rates are presently high). DK Investment uses $100,000 of its own funds and borrow an additional euro 600,000. It will pay 0.5% on its euro borrowed for the next month and will earn 1.0% per month on funds invested in UK (British pounds). Assume the euro spot rate is $1.2/euro and the BP rate is $1.9/BP and after one month the FX rates will be the same. What will be DK Investment Net US$ profit from this carry trade investment? For the calculation of cross FX rate, use two decimal point after rounding up (e.g. 1.1101 is 1.11) O around $4,800 O around $4,600 around $4,200 O around $4,400 D 5 nts
Question 23 DK Investment Co is a US firm that executes a carry trade in which it borrow euros (where interest rates are presently low) and invests in British pounds (where interest rates are presently high). DK Investment uses $100,000 of its own funds and borrow an additional euro 600,000. It will pay 0.5% on its euro borrowed for the next month and will earn 1.0% per month on funds invested in UK (British pounds). Assume the euro spot rate is $1.2/euro and the BP rate is $1.9/BP and after one month the FX rates will be the same. What will be DK Investment Net US$ profit from this carry trade investment? For the calculation of cross FX rate, use two decimal point after rounding up (e.g. 1.1101 is 1.11) O around $4,800 O around $4,600 around $4,200 O around $4,400 D 5 nts
Chapter7: International Arbitrage And Interest Rate Parity
Section: Chapter Questions
Problem 18QA
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