Assume that a bank has assets located in Germany worth

€150 million earning an average of 8 percent. It also holds

€100 in liabilities and pays an average of 6 percent per year.

The current spot rate is €1.50 for $1. If the exchange rate at the end of the year is €2.00 for $1: (LG 20-1)

a. What happened to the dollar? Did it appreciate or depreciate against the euro (€)?

b. What is the effect of the exchange rate change on the net interest margin (interest received minus interest paid) in dollars from its foreign assets and liabilities?

c. What is the effect of the exchange rate change on the value of the assets and liabilities in dollars?

AppendixLO1