Question

In: Economics

North Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange...

North Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange risk. In a recent transaction, it issued a one-year $1.75 million CD at 4 percent and is planning to fund a loan in British pounds at 6 percent for a 2 percent expected spread. The spot rate of U.S. dollars for British pounds is $1.4500/£1. a. However, new information now indicates that the British pound will appreciate such that the spot rate of U.S. dollars for British pounds is $1.4300/£1 by year-end. Calculate the loan rate to maintain the 2 percent spread? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) Loan rate % b. The bank has an opportunity to hedge using one-year forward contracts at 1.4600 U.S. dollars for British pounds. Calculate the net interest margin if the bank hedges its forward foreign exchange exposure? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) Net interest margin % c. Calculate the loan rate to maintain the 2 percent spread if the bank intends to hedge its exposure using the forward rates? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) Loan rate %

Solutions

Expert Solution

Let us try to solve it in the easy way possible:-

Amount of loan incurred €=$1. 75X 1.45=€2.53 Million

Interest and principal at year-end=€2.53X1.06=€2.68/1.43

=€1,874,125.87

Interest and principal ofCD's=

$1.75 million X1. 04(4%)=$1,80,000

Net interest income=$ 1,874,125.87-1,80,000

=$74,125.87/2=0.0037

In order to maintain a 2% spread , the principal and interest earned at $1.43/€1 should be

€2.53(1+x)/1.43=1.82( because 1.82-1.80=0.02)

Therefore, (1+x)=(1.82 X1. 43)/$2.53= 1.02869 and x= 2.89% or 0.0286

b) Net interest income of the bank if hedged=€2.53X 1.06=2.68/1.46

=1.8368 million -1.80 million

=0.03684931 or $36,849.31

Net interest margin=0.0368/2=0.0184 or 18.4%

c)Now in this situation of the bank hedge its exposure using the forward rate then it will be calculated as:-

Firstly to maintain the balance of 2% spread,

Again,

€2.53(1+x)/1.46=1. 82

The bank should increase the rates and hedge with the sale forward €s to maintainthe 2%,spread rate along with 6% interest rate.

Rahul Sunny answered 2 years ago
Next > < Previous

Related Solutions

North Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange...
North Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange risk. In a recent transaction, it issued a one-year $2.25 million CD at 4 percent and is planning to fund a loan in British pounds at 6 percent for a 2 percent expected spread. The spot rate of U.S. dollars for British pounds is $1.4500/£1. a. However, new information now indicates that the British pound will appreciate such that the spot rate of U.S....
North Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange...
North Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange risk. In a recent transaction, it issued a one-year $2.20 million CD at 5 percent and is planning to fund a loan in British pounds at 9 percent for a 4 percent expected spread. The spot rate of U.S. dollars for British pounds is $1.4500/£1. a. However, new information now indicates that the British pound will appreciate such that the spot rate of U.S....
North Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange...
North Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange risk. In a recent transaction, it issued a one-year $1.50 million CD at 4 percent and is planning to fund a loan in British pounds at 6 percent for a 2 percent expected spread. The spot rate of U.S. dollars for British pounds is $1.4500/£1. a. However, new information now indicates that the British pound will appreciate such that the spot rate of U.S....
North Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange...
North Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange risk. In a recent transaction, it issued a one-year $2 million CD at 6 percent and is planning to fund a loan in British pounds at 8 percent for a 2 percent expected spread. The spot rate of U.S. dollars for British pounds is $1.32/£1. a. However, new information now indicates that the British pound will appreciate such that the spot rate of U.S....
North Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange...
North Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange risk. In a recent transaction, it issued a one-year $1.50 million CD at 4 percent and is planning to fund a loan in British pounds at 6 percent for a 2 percent expected spread. The spot rate of U.S. dollars for British pounds is $1.450/£1. a. However, new information now indicates that the British pound will appreciate such that the spot rate of U.S....
North Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange...
North Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange risk. In a recent transaction, it issued a one-year $2.25 million CD at 4 percent and is planning to fund a loan in British pounds at 7 percent. The spot rate of U.S. dollars for British pounds is $1.4530/£1. a. The bank analysts now indicate that the British pound will appreciate such that the spot rate of U.S. dollars for British pounds will be...
A Spanish commercial bank is engaged in the following foreign lending/borrowing and trading activities in U.S...
A Spanish commercial bank is engaged in the following foreign lending/borrowing and trading activities in U.S dollar: a) The bank owns $5,000,000 value of corporate bonds in U.S company b) The bank has lent an U.S. company an amount of $16,000,000 c) The bank has borrowed $8,000,000 from a American bank d) The bank has sold $300,000 to a Spanish customer to facilitate acquisition of raw materials from U.S supplier. e) The bank has purchased $4,000,000 from Spanish investor who...
FIM Bank is an Australian bank. The bank has been borrowing in the Australian markets and...
FIM Bank is an Australian bank. The bank has been borrowing in the Australian markets and lending abroad, thus incurring foreign exchange risk. In a recent transaction, it borrowed $AUD 5 million via a one-year security at 4.5 per cent per annum nominal and funded a loan in Swiss Francs (CHF) at 5.0 per cent. The spot rate at the time of this transaction was 1.5152 AUD = 1 CHF (AUD/CHF = 1.5152). (a)     Information received immediately after the...
Compare operations of foreign exchange markets to domestic markets. Explain how foreign exchange rates, economic conditions,...
Compare operations of foreign exchange markets to domestic markets. Explain how foreign exchange rates, economic conditions, and the international business environment affect prices charged in foreign markets. Support your analysis with a current news source, such as electronic local newspapers, New York Times, International Business Times, Economic Times, or CNN News.
Compare operations of foreign exchange markets to domestic markets. Explain how foreign exchange rates, economic conditions,...
Compare operations of foreign exchange markets to domestic markets. Explain how foreign exchange rates, economic conditions, and the international business environment affect prices charged in foreign markets. Support your analysis with a current news source, such as electronic local newspapers, New York Times, International Business Times, Economic Times, or CNN News.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT