Assume that a bank has assets located in London that are worth $150$million

on which it earns an average of $8$ percent per year. The bank has $100$million

in liabilities on which it pays an average of $6$ percent per year. The current spot

exchange rate is $1\mathrm{.}25/$$$.$

a$.$ If the exchange rate at the end of the year is $2\mathrm{.}00/$$$,$ 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

net interest income from the foreign assets and liabilities? Note: The net inter$-$

est income is interest income minus interest expense.

c$.$ What is the effect of the exchange rate change on the value of assets and

liabilities in dollars?