A USFlhas the following assets andliabilities, and it wishes to use its balance sheet to hedge foreign exchange interest rate risk. Bank of America will offer $400 million in 1 year loans in the US and Europe. The Exchange rate is 1.05 dollars per EURO. The US interest rate for these toans is 4.25% and the interest in Europe is 4.75%. The US Firm will affer 1-year CD's of $400MM at 1.6% in the USA andat 2.5% in Europe. 1. Catculate the Average Return, the Average cost of the funds and the net return. 2. The exchange rate changes to 1EURO=$1.02 Dollar at year end. Calculate the Average Return, the Average cost of the funds and the net return. Does the return rise or drop as a result? Why? 3. What if the F buys a hedge FX contract for $400MM at 1.03 Euros per dollar? Should they buy the FX forward contract or stay with their balance-sheet activifies analyzed in questions 1 and 2 ? What does hedging foreign exchange risk off the balance sheet do to a firm's forelgn exchange rate exposure