A. U.S. FI has US$250 million worth of one-year loans earning an average rate of return...

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A. U.S. FI has US$250 million worth of one-year loans earning an average rate of return of 7.5 percent (i.e. initial investment is US$250 million worth). In addition, the FI also has one-year single- payment Canadian dollar loans of Canadian dollar C$110 million earning 8.5 percent (i.e.initial investment is US$100 million worth). The FI's total funding source is US$350 million in US dollar $ one-year CDs, on which they are paying 4.24 percent interest rate. Initially (at the beginning of the investment period), the exchange rate is C$1.10 per US$1. The one-year forward rate is C$1.14 per US$1. What is the bank's dollar percent spread if they hedge fully using forwards? A. U.S. FI has US$250 million worth of one-year loans earning an average rate of return of 7.5 percent (i.e. initial investment is US$250 million worth). In addition, the FI also has one-year single- payment Canadian dollar loans of Canadian dollar C$110 million earning 8.5 percent (i.e.initial investment is US$100 million worth). The FI's total funding source is US$350 million in US dollar $ one-year CDs, on which they are paying 4.24 percent interest rate. Initially (at the beginning of the investment period), the exchange rate is C$1.10 per US$1. The one-year forward rate is C$1.14 per US$1. What is the bank's dollar percent spread if they hedge fully using forwards?

Answer rating: 100% (QA)

SOLUTION To calculate the FIs dollar percent spread we need to determine the dollar amount of intere... View the full answer