Question Three: SpeculationRead the following case and answer the question that follows.Welles Fargo Bank, based in Los Angeles, California, has the ability to borrow 30 million U.S. dollars(USD) at 5% annualized. It can then invest in either the euro (EUR), the Australian dollar (AUD), or theCanadian dollar (CAD). For simplicity, suppose that the lending rate of all of the euro, the Australiandollar, and the Canadian dollar is 3% annualized over a 10-day time period. The spot rates and theexpected rates of the euro, Australian dollar and the Canadian dollar are given in the table below.Spot Rate(01/06/2022, 09:00 PM)Expected Spot RateAfter 5 daysEUR-USD1.12971.14101 EUR in USDAUD-USD0.71660.73451 AUD in USDCAD-USD0.78570.79361 CAD in USDQuestion:Based on the information given above, determine in which currency should Welles Fargo Bank invest:EUR, AUD or CAD? Justify your answer. Calculate the potential profit in U.S. dollars. Calculate theeffective rate of return on investment.

Different currencies are available at different rates and banks can utilize to earn profit on that.

Read the following case and answer the question that follows. Welles Fargo Bank, based in Los Angeles, California, has the ability to borrow 30 million U. (USD) at 5% annualized. It can then invest in either the euro (EUR), the Australian dollar (AUD Canadian dollar (CAD). For simplicity, suppose that the lending rate of all of the euro, the A dollar, and the Canadian dollar is 3% annualized over a 10-day time period. The spot rates expected rates of the euro, Australian dollar and the Canadian dollar are given in the table belo Spot Rate (01/06/2022, 09:00 PM) Expected Spot Rate After 5 days EUR-USD 1.1297 1.1410 1 EUR in USD AUD-USD 0.7166 0.7345 1 AUD in USD CAD-USD 0.7857 0.7936 1 CAD in USD

Read the following case and answer the question that follows. Welles Fargo Bank, based in Los Angeles, California, has the ability to borrow 30 million U. (USD) at 5% annualized. It can then invest in either the euro (EUR), the Australian dollar (AUD Canadian dollar (CAD). For simplicity, suppose that the lending rate of all of the euro, the A dollar, and the Canadian dollar is 3% annualized over a 10-day time period. The spot rates expected rates of the euro, Australian dollar and the Canadian dollar are given in the table belo Spot Rate (01/06/2022, 09:00 PM) Expected Spot Rate After 5 days EUR-USD 1.1297 1.1410 1 EUR in USD AUD-USD 0.7166 0.7345 1 AUD in USD CAD-USD 0.7857 0.7936 1 CAD in USD

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter7: International Arbitrage And Interest Rate Parity

Section: Chapter Questions

Problem 49QA

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