Citibank raises funds by issuing a one-year bond (liability) of 100,000 at 3.5%. The funds are...

Transcribed Image Text:

Citibank raises funds by issuing a one-year bond (liability) of 100,000 at 3.5%. The funds are used to finance a one-year US$ loan to a US company at 5%. The current exchange rate $1.50/. The one-year forward rate (F$/) $1.55/. What is Citibank's exposure? If Citibank hedges its foreign exchange exposure using the forward contract, what would be the net revenue (loss) from these transactions [$ proceeds from loan - cost of funding]? Would the Citibank manager choose to make these transactions? Citibank is exposed to the depreciation of the E; Loss of $2,925; No, the transactions would not be profitable. O Citibank is exposed to the depreciation of the E: Gain of $2,925; Yes, the transactions would be profitable. O Citibank is exposed to the appreciation of the E: Loss of $2.925: No, the transactions would not be profitable. Citibank is exposed to the appreciation of the : Gain of $2,925; Yes, the transactions would be profitable. Citibank raises funds by issuing a one-year bond (liability) of 100,000 at 3.5%. The funds are used to finance a one-year US$ loan to a US company at 5%. The current exchange rate $1.50/. The one-year forward rate (F$/) $1.55/. What is Citibank's exposure? If Citibank hedges its foreign exchange exposure using the forward contract, what would be the net revenue (loss) from these transactions [$ proceeds from loan - cost of funding]? Would the Citibank manager choose to make these transactions? Citibank is exposed to the depreciation of the E; Loss of $2,925; No, the transactions would not be profitable. O Citibank is exposed to the depreciation of the E: Gain of $2,925; Yes, the transactions would be profitable. O Citibank is exposed to the appreciation of the E: Loss of $2.925: No, the transactions would not be profitable. Citibank is exposed to the appreciation of the : Gain of $2,925; Yes, the transactions would be profitable.