Blue Demon Bank expects that the Mexican peso will depreciateagainst the dollar from its spot rate o

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Blue Demon Bank expects that the Mexican peso will depreciateagainst the dollar from its spot rate of $.15 to $.14 in 10 days.The following interbank lending andborrowing rates exist:

Lending RateBorrowing Rate

U.S.dollar8.0%8.3%

Mexicanpeso8.5%8.7%

Assume that Blue Demon Bank has aborrowing capacity of either $10 million or 70 million pesos in theinterbank market, depending onwhich currency it wants toborrow.

a.How could BlueDemon Bank attempt to capitalize on its expectations without usingdeposited funds? Estimate the profitsthat could be generated fromthis strategy.

b.Assume all the precedinginformation with this exception: Blue Demon Bank expects the pesoto appreciate from its presentspot rate of $.15 to $.17 in 30days. How could it attempt to capitalize on its expectationswithout using deposited funds? Estimate the profits that couldbegenerated from this strategy.

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