An FI Has Purchased (Borrowed)a One-Year $10 Million Eurodollar Deposit

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 if the bank can sell one-year forward Euros at €1.755/$?

A) -0.70 percent.
B) -0.25 percent.
C) 0.00 percent.
D) 0.20 percent.

Correct Answer:

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