Suppose that a U.S. FI has the following assets and liabilities: Assets Liabilities $ 300 million U.
Question:
Suppose that a U.S. FI has the following assets and liabilities:
Assets Liabilities
$ 300 million U. S. loans …………………. $ 500 million U. S. CDs
(one year) in dollars ………………………. (one year) in dollars
$ 200 million equivalent
German loans (one year) (loans made in euros)
The promised one-year U.S. CD rate is 4 percent, to be paid in dollars at the end of the year; one-year, default risk–free loans in the United States are yielding 6 percent; and default risk–free one-year loans are yielding 10 percent in Germany. The exchange rate of dollars for euros at the beginning of the year is $ 1.25/£1.
a. Calculate the dollar proceeds from the German loan at the end of the year, the return on the FI’s investment portfolio, and the net interest margin for the FI if the spot foreign exchange rate has not changed over the year.
b. Calculate the dollar proceeds from the German loan at the end of the year, the return on the FI’s investment portfolio, and the net interest margin for the FI if the spot foreign exchange rate falls to $ 1.15/€ 1 over the year.
c. Calculate the dollar proceeds from the German loan at the end of the year, the return on the FI’s investment portfolio, and the net interest margin for the FI if the spot foreign exchange rate rises to $ 1.35/€ 1 over the year.
Exchange RateThe value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...
Step by Step Answer:
Financial Markets and Institutions
ISBN: 978-0077861667
6th edition
Authors: Anthony Saunders, Marcia Cornett