Suppose that a U$.$S$.$ FI has the following assets and liabilities:

Assets

Liabilities

$$300$ Million U$.$S$.$ loans $($one year$),$ Loan made in dollar $(7\%)$

$$500$ million U$.$S$.$ CDs $($one year$)$ in dollar $(5\%)$

$$200$ Million equivalent U$.$ K$.$ loans $($one year$),$ Loan made in pounds $(11\%)$

The promised one$-$year U$.$S$.$ CD rate is $5$ percent, to be paid in dollars at the end of the year; the one$-$year, default risk$$free loans are yielding $7$ percent in the United States; and one$-$year default risk$$free loans are yielding $11$ percent in the United Kingdom. The spot exchange rate at the beginning of the year is $$1\mathrm{.}25/1$ and at the end of year is $$1\mathrm{.}15/1.$ The one year forward exchange rate is $$1\mathrm{.}30/1.$

Required:

a$.$ Calculate the net return for the U$.$S$.$ FI over the year, assume that the U$.$S$.$ FI did not sign the contract of forward exchange rates. $(4$ marks$)$

b$.$ Calculate the net return for the U$.$S$.$ FI over the year, assume that the U$.$S$.$ FI signed a contract of one year forward exchange rate. $(4$ marks$)$

c$.$ Assume that the U$.$S$.$ FI signed a contract of one year forward exchange rate. The FI funds the British loans with $$200$ million equivalent $($i$.$e$.,160$m$)$ one$-$year pound CDs at a rate of $7$ percent, and funds U$.$S$.$ loans with $$300$ million one year U$.$S$.$ CDs at a rate of $5$ percent. Calculate the net return for the U$.$S$.$ FI over the year. $(4$ marks$)$

Echo$360$ Plugin $($Atto$)$