Assets Liabilities

1 year 8% Loan (US $160 million) 1 year 7% CD (100 million)

The current spot rate is $1.60/

If the exchange rate remains the same, what is the dollar spread earned by the bank at the end of the year?

a. $750,000

b. $1,000,000

c. $1,250,000

d. $1,600,000

e. $1,750,000

If at the end of the year, the exchange rate is $1.65/,, what is the net gain or loss by the FI in dollars? Note that both the principal and interest will have to be converted at prevailing rates.

a. -$3,750,000

b. -$1,250,000

c. +$1,250,000

d. +$3,750,000

e. +$5,000,000

If the current (spot) rate for one-year British pound futures is currently at $1.58/ and each contract size is 62,500, how many contracts are required to be purchased or sold in order to fully hedge against the pound exposure? (Assume no basis risk.)

a. Long 1600 BP futures

b. Short 1712 BP futures

c. Long 1712 BP futures

d. Short 2560 BP futures

e. Long 2560 BP futures