Reference no: EM132710000

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

Assets

$10 million cash (in dollars)

$100 million U.S. loans (one year) (in dollars) (12%)

$100 million equivalent UK loans (one year) (loans made in pounds) (10%)

Liabilities

$200 million U.S. CDs (one year) (in dollars) (5%)

$10 million borrowed funds (in dollars) (6%)

The current spot exchange rate is $1.5/£

Problem 1: If the spot foreign exchange rate falls to $1.55/£1 over the year, calculate

1. the dollar proceeds from the UK loan at the end of the year

2. the return on the UK loan

3. the return on the loan portfolio

4. the net interest income for the FI at the end of year