You live in the United States and want to try to make some money through interest rate arbitrage abroad. You notice the following rates quoted online: Bid Ask Spot exchange rate USD 1.1228/EUR USD 1.1265/EUR 150-day Forward exchange rate USD 1.1599/EUR USD 1.1648/EUR 150-day USD interest rate 11.49% p.a. 11.97% p.a. 150-day EUR interest rate 8.49% p.a. 8.72% p.a. What will your profit (in USD) be 150 days from now if you borrow USD17 million and invest in France then convert back to the U.S dollar? O a. USD 275,369 O b. USD 446,119 O c. USD 326,144 O d. USD 267,440 Oe. USD 316,753

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Loanable Funds Theory

The loanable funds theory is a neoclassical theory that determines the interest rate where the demand for loanable investments and supply of loanable funds intersect. To determine the interest rate, this theory employs linear regression and a demand curve. At the equilibrium point, demand for borrowings and demand for the issuance of borrowing funds are inextricably linked. This point of equilibrium should equalize demand and the supply of money available for borrowing.