Question
3. (15 pts) Assume that a bank has assets located in London that are worth 250 million on which it earns an average of
3. (15 pts) Assume that a bank has assets located in London that are worth 250 million on which it earns an average of 8 percent per year. The bank has 200 million in liabilities on which it pays an average of 6 percent per year. The current spot exchange rate is 1.21/$. a. If the exchange rate at the end of the year is 1.34/$, will the dollar have appreciated or depreciated against the pound? b. Given the change in the exchange rate, what is the effect in dollars on the NII from their foreign liabilities and assets? c. What is the effect of the change in exchange rates on the value of their liabilities and assets in dollars?
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