Sun Bank USA has purchased a 16 million one- year Australian dollar loan that pays 12 percent interest annually. The spot rate of U.S. dollars for Australian dollars is $ 0.625/A$1. It has funded this loan by accepting a British pound (BP) – denominated deposit for the equivalent amount and maturity at an annual rate of 10 percent. The current spot rate of U. S. dollars for British pounds is $ 1.60/£1.
a. What is the net interest income earned in dollars on this one-year transaction if the spot rate of U. S. dollars for Australian dollars and U.S. dollars for BPs at the end of the year are $ 0.588/ A$ 1 and $ 1.848/£1, respectively?
b. What should the spot rate of U.S. dollars for BPs be at the end of the year in order for the bank to earn a net interest income of $ 200,000 (disregarding any change in principal values)?