Products

Holooly Rewards

We are determined to provide the latest solutions related to all subjects FREE of charge!

Please sign up to our reward program to support us in return and take advantage of the incredible listed offers.

Enjoy Limited offers, deals & Discounts by signing up to Holooly Rewards Program

Holooly Ads. Manager

Advertise your business, and reach millions of students around the world.

Holooly Tables

All the data tables that you may search for.

Holooly Arabia

For Arabic Users, find a teacher/tutor in your City or country in the Middle East.

Holooly Sources

Find the Source, Textbook, Solution Manual that you are looking for in 1 click.

Holooly Help Desk

Need Help? We got you covered.

Chapter 4

Q. 4.ST.3

Smart Banking Corp. can borrow $5 million at 6 per cent annualized. It can use the proceeds to invest in Canadian dollars at 9 percent annualized over a six-day period. The Canadian dollar is worth $.95 and is expected to be worth $.94 in six days. Based on this information, should Smart Banking Corp. borrow U.S. dollars and invest in Canadian
dollars? What would be the gain or loss in U.S. dollars?

Step-by-Step

Verified Solution

Smart Banking Corp. should not pursue the strategy because a loss would result, as shown here.
a. Borrow $5 million.
b. Convert $5 million to C$5,263,158 (based on the spot exchange rate of $.95 per C$).
c. Invest the C$ at 9 percent annualized, which represents a return of .15 percent over 6 days, so the C$ received after 6 days = C$5,271,053 (computed as C$5,263,158 × [1 + .0015]).
d. Convert the C$ received back to U.S. dollars after 6 days: C$5,271,053 = $4,954,789 (based on anticipated exchange rate of $.94 per C$ after 6 days).
e. The interest rate owed on the U.S. dollar loan is .10 percent over the 6-day period. Thus, the amount owed as a result of the loan is $5,005,000 [computed
as $5,000,000 × (1 + .001)].
f. The strategy is expected to cause a gain of $4,954,789 – $5,005,000 = -$50,211.