Credit risk-free loans in the united states

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Reference no: EM133075634

Problem:

Assets

Liabilities

$10 million

U.S. loans (10 percent)

$20 million

U.S. CDs (9 percent)

$10 million

UK loans (16 percent) (loans made in sterling)

 

A U.S. FI is raising all of its $20 million liabilities in dollars (one-year CDs) but investing 50 percent in U.S. dollar assets (one-year maturity loans) and 50 percent in UK pound sterling assets (one-year maturity loans). Suppose the promised one-year U.S. CD rate is 9 percent, to be paid in dollars at the end of the year, and that one-year, credit risk-free loans in the United States are yielding only 10 percent. Credit risk-free one-year loans are yielding 16 percent in the United Kingdom.

If the spot foreign exchange rate remains constant at $1.60 to ≤1 throughout the year, the return from the UK investment will be

Reference no: EM133075634

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