1.Brumby Bank has been borrowing in the Australian markets and lending abroad, thus incurring foreign exchange risk. In a recent transaction, it issued $2 million in one-year securities at 6 per cent and funded a loan in euro at 8 per cent. The spot rate for the euro was €1.45/$1 at the time of the transaction.

Information received immediately after the transaction closing indicated that the pound will depreciate to €1.47/$1 by year-end. If the information is correct, what will be the realised spread on the loan? What should have been the bank interest rate on the loan to maintain the 2 per cent spread?

The bank had an opportunity to sell one-year forward euros at €1.46/$1. What would have been the spread on the loan if the bank had hedged forward its foreign exchange exposure?

What would have been an appropriate change in loan rates to maintain the 2 per cent spread if the bank intended to hedge its exposure using forward contracts? LO 13.3, 13.5, 13.6