Question
Atlantic Bank has purchased a 16 million one-year loan that pays 12 percent interest annually. The spot rate of Canadian dollars per euro is $1.25/.
Atlantic Bank has purchased a 16 million one-year loan that pays 12 percent interest annually. The spot rate of Canadian dollars per euro is $1.25/. Atlantic Bank has funded this loan by accepting a U.K. pound ()-denominated deposit for the equivalent amount and maturity at an annual rate of 10 percent. The current spot rate of the U.K. pound is $1.60/1. a. What is the net interest income (NII) earned in dollars on this one-year transaction if the spot rates of Canadian dollars per euro and Canadian dollars per British pound at the end of the year are 1.35 and 1.70? b. What should be the spot rate of Canadian dollars per British pound at the end of the year in order for the bank to earn a net interest margin of 4 percent? d. What is the total effect on net interest income and principal of this transaction given the end-of-year spot rates in part (a)?
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