Question
ABC Bank has been borrowing in the U.S. markets and lending abroad, thus incurring foreign exchange risk. In a recent transaction, it issued a one-year,
ABC Bank has been borrowing in the U.S. markets and lending abroad, thus incurring foreign exchange risk. In a recent transaction, it issued a one-year, $2 million CD at 6 percent and funded a loan in euros at 8 percent. The spot rate for the euro was 1.15/$1 (1.15 euros per US dollar) at the time of the transaction. Information received immediately after the transaction closing indicated that the euro for dollar exchange rate will change to 1.17/$1 by year-end. If the information is correct, what will be the net return on the loan inclusive of principal?
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