Devon Bank has been borrowing in the UK market and lending abroad. In a recent

transaction, it issued a one$-$year $2,000,000CD$ at $6\%$ and is planning to fund a loan

in Swiss Francs $($CHF$)$ at $8\%.$ The spot rate is CHF$2\mathrm{.}90/.$ The bank aims to

maintain the same net interest margin $($NIM$)$ for the forthcoming year. New

information now indicates that the exchange rate would be CHF$2\mathrm{.}94/$ by year$-$end.

a$)$ what should the bank charge on the loan in order to maintain the spread? b$)$ what

is the percentage change in the spread if the FX forecast is realised? c$)$ what is the

percentage change in the NIM per $1\%$ change in the spot exchange rate? d$)$ the one$-$

year FX forward rate is CHF$2\mathrm{.}92/.$ What is the spread on the loan if the bank uses

the FX forward market? e$)$ what should the loan rate be in order to maintain the

spread, if the bank uses the FX forward market?

Solution

a$)9\mathrm{.}49\%$

b$)73\mathrm{.}5\%$

c$)53\mathrm{.}26\%$

d$)1\mathrm{.}25\%$

e$)8\mathrm{.}76\%$