Question

In: Finance

Chase Manhattan has purchased a 7 million one-year Canadian dollar loan that pays 8.5% interest annually....

Chase Manhattan has purchased a 7 million one-year Canadian dollar loan that pays 8.5% interest annually. The spot rate of U.S. dollars for Canadian dollars is 0.70. It has funded this loan by accepting a Euro-denominated deposit for the equivalent amount and maturity at an annual rate of 7%. The current spot rate of U.S. dollars for Euros is 1.25. Note: Banks earn interest on loans and pay interest on deposits.
1. What is the loan amount in dollars?

What is the deposit amount in Euros?

What is the interest income earned in US dollars on this one-year transaction if the spot rate of U.S. dollars for Canadian dollars and U.S. dollars for Euros at the end of the year are 0.67 and 1.30, respectively?

What is the interest expense in dollars?

Expert Solution

a. Loan amount in dollars = ?

Loan amount in Canadian dollar = 7000000

Spot rate of U.S. dollars for Canadian dollars = 0.70

Loan Amount in dollars = loan amount in local currency * Spot rate of U.S. dollars for local currency

= 7000000 * 0.70 = 4900000

b. Deposit amount in Euros = equivalent amount as the loan as given in question

Loan Amount in dollars = 4900000

Spot rate of U.S. dollars for for Euros = 1.25

Deposit amount in Euros = Deposit Amount in dollars / Spot rate of U.S. dollars for for Euros

= 4900000 / 1.25 = 3920000

c. Interest income earned in US dollar = ( loan amount purchased * interest rate ) * Spot rate of U.S. dollar for loan currency

Loan Amount = 7000000

Interest rate = 8.5%

Spot rate of U.S. dollars for Canadian dollars = .67

Interest income earned in US dollar = ( 7000000 * 8.5/100) * .67 = 398650

d. Interest expense in dollars = ( Deposit amount * interest rate ) * Spot rate of U.S. dollar for loan currency

Deposit Amount = 3920000

Interest rate = 7%

Spot rate of U.S. dollars for Canadian dollars = 1.3

Interest income earned in US dollar = ( 3920000 * 7/100) * 1.3 = 356720

Chase Manhattan earn money on Loan and pay interest on deposit earn net income of 41930. (398650 - 356720)

jeff jeffy answered 8 months ago

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