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Riskless profit from two continuously compounded accounts

Question

Two bank accounts both start at value 11: account B1B_1 grows at a continuously compounded 4%4\% per year and account B2B_2 at 2%2\%. You start with no money, and you may only deposit into or borrow from each account in whole units; simply depositing your own cash is not an option. What is the smallest profit you can lock in after one year? Give two decimal places.

Short answer

About 0.020.02. Borrow one unit from the 2%2\% account and deposit it in the 4%4\% account. After a year you hold e0.04e^{0.04} and owe e0.02e^{0.02}, a riskless gain of e0.04−e0.02≈0.0206e^{0.04}-e^{0.02}\approx0.0206.

Adapted from QuantQuestions.io; question and answer rewritten by SelfMadeQuant.com.

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