EECS 1710 Lecture Notes - Lecture 23: Spot Contract
24 Jun 2018
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EECS 1710 Lecture 23 Notes
Introduction
At End of Investment Period
Hampton Investment Co. is a U.S. firm that executes a carry trade in which it borrows
euros (where interest rates are presently low) and invests in British pounds (where
interest rates are presently high).
Hampton uses $100,000 of its own funds and borrows an additional 600,000 euros.
It will pay .5 percent on its euros borrowed for the next month and will earn 1.0 percent
on funds invested in British pounds.
Assume that the euro’s spot rate is $1.20 and that the British pound’s spot rate is $1.80
(so the pound is worth 1.5 euros at this time).
Hampton uses today’s spot rate as its best guess of the spot rate one month from now.
Hampton’s expected profits from its carry trade can be derived as follows.
At Beginning of Investment Period
Hampton invests $100,000 of its own funds into British pounds: $100,000=($1.80 per
pound) ¼ 55,555 pounds
Hampton borrows 600,000 euros and converts them into British pounds: 600,000
euros=(1.5 euros per pound) ¼ 400,000 pounds
Hampton’s total investment in pounds: 55,555 pounds þ 400,000 pounds ¼ 455,555
pounds
Hampton receives: 455,555 1.01 ¼ 460,110 pounds
Hampton repays loan in euros: 600,000 euros 1.005 ¼ 603,000 euros
Amount of pounds Hampton needs to repay loan in euros: 603,000 euros=(1.5 euros per
pound) ¼ 402,000 pounds
Amount of pounds Hampton has after repaying loan: 460,110 pounds 402,000 pounds
¼ 58,110 pounds
Hampton converts pounds held into U.S. dollars: 58,110 pounds $1.80 per pound ¼
$104,598
Document Summary
Hampton investment co. is a u. s. firm that executes a carry trade in which it borrows euros (where interest rates are presently low) and invests in british pounds (where interest rates are presently high). Hampton borrows 600,000 euros and converts them into british pounds: 600,000 euros=(1. 5 euros per pound) 400,000 pounds. Amount of pounds hampton has after repaying loan: 460,110 pounds 402,000 pounds. Hampton converts pounds held into u. s. dollars: 58,110 pounds . 80 per pound . A u. s. firm that executes a carry trade in which it borrows euros (where interest rates are presently low) and invests in british pounds (where interest rates are presently high). Hampton uses ,000 of its own funds and borrows an additional 600,000 euros. It will pay . 5 percent on its euros borrowed for the next month and will earn 1. 0 percent on funds invested in british pounds.
