1. (25 pts) A Canada-based bank reports its financials in Canadian Dollars (C\$). At the beginning of year, the bank has the following assets and liabilities: Assume the following conditions: - the beginning-of-year spot exchange rate is US $0.8/C$; - the Canadian loans will mature in one year, are default-free, and have an interest rate of 6% - the U.S. loans will also last for one year, are default-free, and have an interest rate of 5\%; - the Canadian CDs will mature in one year and have an interest rate of 3%. a. (20 pts) Assume the bank does not hedge against foreign exchange risk, and the end-of-year spot exchange rate turns out to be US\$0.9/C\$. What's the bank's overall profitability in C\$? Hint1: consider all three lines of businesses. Hint 2: measure the profitability in C\$, not US\$ or \%. Hint 3: keep 2 decimal places and show your work. b. (5 pts) Show how on-balance-sheet hedging can be done. You can either write in narratives or draw a new balance sheet. You don't have to show math/calculation on how the OBS hedging works. 1. (25 pts) A Canada-based bank reports its financials in Canadian Dollars (C\$). At the beginning of year, the bank has the following assets and liabilities: Assume the following conditions: - the beginning-of-year spot exchange rate is US $0.8/C$; - the Canadian loans will mature in one year, are default-free, and have an interest rate of 6% - the U.S. loans will also last for one year, are default-free, and have an interest rate of 5\%; - the Canadian CDs will mature in one year and have an interest rate of 3%. a. (20 pts) Assume the bank does not hedge against foreign exchange risk, and the end-of-year spot exchange rate turns out to be US\$0.9/C\$. What's the bank's overall profitability in C\$? Hint1: consider all three lines of businesses. Hint 2: measure the profitability in C\$, not US\$ or \%. Hint 3: keep 2 decimal places and show your work. b. (5 pts) Show how on-balance-sheet hedging can be done. You can either write in narratives or draw a new balance sheet. You don't have to show math/calculation on how the OBS hedging works
