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Question
An FI has purchased (borrowed) a one-year $10 million Eurodollar deposit at an annual interest rate of 6 percent. It has invested these proceeds in one-year Euro () bonds at an annual rate of 6.5 percent after converting them at the current spot rate of 1.75/$. Both interest and principal are paid at the end of the year.
What is the spread earned by the bank at the end of the year if the exchange rate remains at 1.75/$?
A. 0.50 percent.
B. 1.00 percent.
C. 1.5 percent.
D. 2.0 percent.
E. 2.5 percent.
Answer
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