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

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 if the end-of-year exchange rate is €1.77/$?

A) -1.00 percent.
B) -0.70 percent.
C) -0.25 percent.
D) 0.00 percent.
E) 0.20 percent.

Correct Answer:

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