Bank USA just made a one-year $10 million loan that pays 10 percent interest annually. The loan was funded with a Swiss franc-denominated one-year deposit at an annual rate of 6 percent. The current spot rate is SF1.05/$1.
a. What will be the net interest income in dollars on the one-year loan if the spot rate at the end of the year is SF1.03/$1?
b. What will be the net interest return on assets?
c. What is the total effect on net interest income and principal of this transaction given the end-of-year spot rates in part (a)?
d. How far can the SF/$ appreciate before the transaction will result in a loss for Bank USA?