Suppose that, instead of funding the $ 200 million investment in 10 percent German loans with U.S.

Question:

Suppose that, instead of funding the $ 200 million investment in 10 percent German loans with U.S. CDs, the FI manager in Problem 10 funds the German loans with $ 200 million equivalent one-year euro CDs at a rate of 7 percent. Now the balance sheet of the FI would be as follows:

a. Calculate the return on the FI’s investment portfolio, the average cost of funds, and the net interest margin for the FI if the spot foreign exchange rate falls to $ 1.15/€ 1 over the year.

b. Calculate the return on the FI’s investment portfolio, the average cost of funds, and the net interest margin for the FI if the spot foreign exchange rate rises to $ 1.35/€ 1 over the year.

Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial... Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...