Suppose that, instead of funding the $200 million investment in 10 percent German loans with U.S. CDs, the FI manager in Problem 10 funds the German loans with $200 million equivalent one-year euro CDs at a rate of 7 percent. Now the balance sheet of the FI would be as follows: (LG 9-5)

Assets Liabilities

$300 million U.S. loans (6%) $300 million U.S. CDs (4%)

$200 million equivalent German loans (10%)

in euros

$200 million equivalent German CDs (7%)

in euros

a. Calculate the return on the FI’s investment portfolio, the average cost of funds, and the net interest margin for the FI if the spot foreign exchange rate falls to $1.00/€1 over the year.

b. Calculate the return on the FI’s investment portfolio, the average cost of funds, and the net interest margin for the FI if the spot foreign exchange rate rises to $1.20/€1 over the year.

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