Question

In: Finance

Six months ago, Qualitybank issued a $132 million, one-year-maturity CD, denominated in British pounds (Euro CD)....

Six months ago, Qualitybank issued a $132 million, one-year-maturity CD, denominated in British pounds (Euro CD). On the same date, $76 million was invested in a £-denominated loan and $56 million in a U.S. Treasury bill. The exchange rate on this date was £1.5382 for $1. If you assume no repayment of principal and if today’s exchange rate is £1.1905 for $1:

1. What is the current value of the Euro CD principal in dollars and pounds? (Do not round intermediate calculations. Enter your answers in millions. Round your answers to 2 decimal places. (e.g., 32.16))

  Euro CD principal in pounds £   
  Euro CD principal in dollars $   

2. What is the current value of the British loan principal in dollars and pounds? (Do not round intermediate calculations. Enter your answers in millions. Round your answers to 2 decimal places. (e.g., 32.16))

  British loan principal in pounds £   
  British loan principal in dollars $   

3. What is the current value of the U.S. Treasury bill in dollars and pounds? (Do not round intermediate calculations. Enter your answers in millions. Round your answers to 2 decimal places. (e.g., 32.16))

  U.S. Treasury bill in pounds £   
  U.S. Treasury bill in dollars $   

4. What is Qualitybank’s profit/loss from this transaction in dollars and pounds? (Input all amounts as positive values. Do not round intermediate calculations. Enter your answers in millions. Round your answers to 2 decimal places. (e.g., 32.16))

  Qualitybank’s (Click to select)profitloss in pounds £   
  Qualitybank’s (Click to select)profitloss in dollars $   

Solutions

Expert Solution

Question 1

Euro CD principal in pounds = 132*1.5382 = 203.04 millions

Euro CD principal in dollars = 203.04/1.1905 = 170.55 millions

Question 2

British Loan principal in pounds = 76*1.5382 = 116.90 millions

British Loan principal in dollars = 116.9 / 1.1905 = 98.20 millions

Question 3

Value of US Treasury in dollars = 56 millions

Value of US Treasury in pounds = 56*1.1905 = 66.67 millions

Question 4

Dollar Profits

CD raised in dollars = 132

Value of CD now in dollars = 170.55

Loss in CD = 170.55-132 = 38.55 millions

Profit/Loss on US Treasury = 0 (since it was in USD only)

Profit/Loss on British Loan = 98.2-76 = 22.2 millions profits

Hence, net loss = 38.55 - 22.2 = 16.3522 millions dollars

Pounds Profit/Loss

Loss/Gain on CDs = 0 (Since they were raised in pounds and settlement is also in pounds)

Loss/Gain on Treasury bonds = (56*1.5382) - 66.67 = 19.4712 millions loss

Loss/gain on British Loans = 0 (Since the investment was in pounds)

Hence, total loss = 19.4712 millions pounds


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