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

The promised one-year U.S. CD rate is 5 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 States; and one-year, default risk–free loans are yielding 12 percent in the United Kingdom. The exchange rate of dollars for pounds at the beginning of the year is $1.60/£1.

a.     Calculate the dollar proceeds from the UK investment 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 UK investment 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 $1.45/£1 over the year.

c. Calculate the dollar proceeds from the UK investment 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 $1.70/£1 over the year.

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Assets $100 million U.S. loans (one year) in dollars $100 million equivalent Liabilities $200 million U.S. CDs (one year) in dollars U.K. loans (one year) (loans made in pounds)