1) Blue Demon Bank expects that the Mexican peso will depreciate against the dollar from its spot rate of $0.058 to $0.053 in 10 days.

1)    Blue Demon Bank expects that the Mexican peso will depreciate against the dollar from its spot rate of $0.058 to $0.053 in 10 days. The following interbank lending and borrowing nominal annualized rates exist:

                                                     Lending Rate               Borrowing Rate

                                     U.S. dollar         4.0% per yr                                                                        4.4% per yr

                                   Mexican peso                  8.2%                                          per yr                                                                 8.8% per yr

Assume that Blue Demon Bank has a borrowing capacity of either $10 million or 170 million pesos in the interbank market, depending on which currency it wants to borrow.

a.     How could Blue Demon Bank attempt to capitalize on its expectations without using deposited funds? Estimate the profits that could be generated from this strategy.

b.     Assume all the preceding information with this exception: Blue Demon Bank expects the peso to appreciate from its present spot rate of $0.058 to $0.064 in 30 days. How could it attempt to capitalize on its expectations without using deposited funds? Estimate the profits that could be generated from this strategy.

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