Question: Hello, I am doing exercises to practice for my exam in Financial Markets and Institutions and need step by step help to solve this. A

Hello, I am doing exercises to practice for my exam in Financial Markets and Institutions and need step by step help to solve this.

A U.S. FI has $200 million worth of one-year loans earning an average rate of return of 5 percent. The FI also has one-year single-payment British pound loans of 80 million earning 7 percent. The FI's funding source is $300 million in US$ one-year CDs, on which they are paying 3 percent. Initially the exchange rate is $1.25/1. The one-year forward rate is $1.20/1.

a. What is the one-year rate of return on the British pound loan, considering the forward exchange rate, if they hedge fully by selling pounds forwards?

b. What is the average rate of dollar return in percentage terms on the US$ and British pound loans?

c. What is the bank's dollar percent spread (profit)?

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