7.Large commercial banks maintain demand deposit accounts with one another, which facilitates the efficient functioning of the FX market

Bank A is in London. Bank B is in New York.

The current exchange rate is 1.00 = $1.25.

A currency trader employed at Bank A buys 320m from a currency trader at Bank B for $400 settled using its correspondent relationship.

The following is the balance sheet of Bank A and show the balance sheet after the above transactions happened

Bank A (London) 000s

Assets	Liabilities and Equity
	OLD	NEW		OLD	NEW
deposit at B	600	?	B's $ deposit	$1160	?
$ deposit at B	$1600	?	B's deposit	1200	?
Cash in the Vault	1200	?	Other Liabilities	600	?
Other Assets	800	?	Owners' Equity	1152	?
Total	3,880	?	Total	3,880	?

(Marking Scheme;; 1mark for correct answer (1x10)=10marks)

Q 6. An Investor has 20000 and faces an interest of 5% in the Euro Zone or he could his Euro for pound sterling at the spot exchange rate and invest in UK market which gives interest of 15%

The following are currency exchange rates

1.00=$1.50 and 1.00==$1.20 which makes the spot cross rate 1.25=1.00

Find out a) the IRP forward rate of vs and b) how much he will earn extra if invested in UK market? ( 5marks ) (Marking Scheme;; 1mark for correct answer and 4 marks for calculation=5 marks)