East Bank has purchased a 5 million one-year Swiss franc (Sf) loan that pays 6 percent interest annually. The spot rate of U.S. dollars for Swiss francs (CHF/USD) is 1.0175. It has funded this loan by accepting a Canadian dollar (C$)–denominated deposit for the equivalent amount and maturity at an annual rate of 4 percent. The current spot rate of U.S. dollars for Canadian dollars (CAD/USD) is 0.7710. (LG 9-5)

a. What is the net interest income earned in dollars on this one-year transaction if the spot rate of U.S. dollars for Sfs and U.S. dollars for C$s at the end of the year are 1.0310 and 0.7680, respectively?

b. What should the spot rate of U.S. dollars for C$s be in order for the bank to earn a net interest income of $108,000 (disregarding any change in principal values)? LO.1