Suppose that a U.S. FI has the following assets and liabilities:

The promised one-year U.S. CD rate is 4 percent, to be paid in dollars at the end of the year; the one-year, default risk–free loans are yielding 6 percent in the United Sates; and one-year default risk–free loans are yielding 10 percent in Germany. The exchange rate of dollars for euros at the beginning of the year is $1.25/€1.

a. Calculate the dollar proceeds from the German loan at the end of the year, the return on the FI’s investment portfolio, and the net return for the FI if the spot foreign exchange rate has not changed over the year.

b. Calculate the dollar proceeds from the German loan at the end of the year, the return on the FI’s investment portfolio, and the net return for the FI if the spot foreign exchange rate falls to $1.15/€1 over the year.

c. Calculate the dollar proceeds from the German loan at the end of the year, the return on the FI’s investment portfolio, and the net return for the FI if the spot foreign exchange rate rises to $1.35/€1 over the year.

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Assets $300 million U.S. loans (one year) in dollars $200 million equivalent German loans (one year) (loans made in euros) Liabilities $500 million U.S. CDs (one year) in dollars