#28

A U.S. FI is raising all of its $20 million liabilities in dollars (one-year CDs) but investing 63 percent in U.S. dollar assets (one-year maturity loans) and the rest in UK pound sterling assets (one-year maturity loans).

Suppose the promised one-year U.S. CD rate is 9 percent, to be paid in dollars at the end of the year, and that one-year, credit risk-free loans in the United States are yielding only 10 percent. Credit risk-free one-year loans are yielding 16 percent in the United Kingdom. Assume that the exchange rate between U.S. dollar and the UK pound sterling has not changed during this time period.

What would be the weighted return on the bank's portfolio of investments?