Suppose that instead of funding the $200 million investment in 10 percent German loans with CDs issued in Germany, the FI manager in problem 19 hedges the foreign exchange risk on the German loans by immediately selling its expected one-year euro loan proceeds in the forward FX market. The current forward one-year exchange rate between dollars and euros is $1.20/€1.

a. Calculate the return on the FI’s investment portfolio (including the hedge)

and the net interest margin for the FI over the year.

b. Will the net return be affected by changes in the dollar for euro spot foreign exchange rate at the end of the year?