Suppose that instead of funding the $300 million investment in 8 percent British loans with CDs issued in the United Kingdom, the FI manager hedges the foreign exchange risk on the British loans by immediately selling its expected oneyear pound loan proceeds in the forward FX market. The current forward one-year exchange rate between dollars and pounds is $1.53/£1.

Additionally, instead of funding the $200 million investment in 10 percent Turkish loans with CDs issued in the Turkey, the FI manager hedges the foreign exchange risk on the Turkish loans by immediately selling its expected one-year lira loan proceeds in the forward FX market. The current forward one-year exchange rate between dollars and Turkish lira is $0.5486/

TRY1. Calculate the return on the FI’s investment portfolio (including the hedge) and the net interest margin for the FI over the year.