Foreign Exchange Risk Exposure Suppose that a U.S. FI has the following assets and liabilities: Assets $500 million U.S. loans (one year) in dollars Liabilities $1,000 million U.S. CDs (one year) in dollars $300 million equivalent U.K. loans (one year) (loans made in pounds) $200 million equivalent Turkish loans (one year) (loans made in Turkish lira) The promised one-year U.S. CD rate is 4 percent, to be paid in dollars at the end of the year; the one-year, default risk-free loans are yielding 6 percent in the United States; one year default risk-free loans are yielding 8 percent in the United Kingdom; and one-year default risk-free loans are yielding 10 percent in Turkey. The exchange rate of dollars for pounds at the beginning of the year is $1.6/1, and the exchange rate of dollars for Turkish lira at the beginning of the year is $0.5533/TL. 7. Suppose that instead of funding the $300 million investment in 8 percent British loans with CDs issued in the United Kingdom, the Fl manager hedges the foreign exchange risk on the British loans by immediately selling its expected one-year pound loan proceeds in the forward FX market. The current forward one-year exchange rate between dollars and pounds is $1.53/1. Additionally, instead of funding the $200 million investment in 10 percent Turkish loans with CDs issued in the Turkey, the Fl manager hedges the foreign exchange risk on the Turkish loans by immediately selling its expected one-year lira loan proceeds in the forward FX market. The current forward one-year exchange rate between dollars and Turkish lira is $0.5486/TL. Calculate the return on the FI's investment portfolio (including the hedge) and the net return for the Fl over the year. Foreign Exchange Risk Exposure Suppose that a U.S. FI has the following assets and liabilities: Assets $500 million U.S. loans (one year) in dollars Liabilities $1,000 million U.S. CDs (one year) in dollars $300 million equivalent U.K. loans (one year) (loans made in pounds) $200 million equivalent Turkish loans (one year) (loans made in Turkish lira) The promised one-year U.S. CD rate is 4 percent, to be paid in dollars at the end of the year; the one-year, default risk-free loans are yielding 6 percent in the United States; one year default risk-free loans are yielding 8 percent in the United Kingdom; and one-year default risk-free loans are yielding 10 percent in Turkey. The exchange rate of dollars for pounds at the beginning of the year is $1.6/1, and the exchange rate of dollars for Turkish lira at the beginning of the year is $0.5533/TL. 7. Suppose that instead of funding the $300 million investment in 8 percent British loans with CDs issued in the United Kingdom, the Fl manager hedges the foreign exchange risk on the British loans by immediately selling its expected one-year pound loan proceeds in the forward FX market. The current forward one-year exchange rate between dollars and pounds is $1.53/1. Additionally, instead of funding the $200 million investment in 10 percent Turkish loans with CDs issued in the Turkey, the Fl manager hedges the foreign exchange risk on the Turkish loans by immediately selling its expected one-year lira loan proceeds in the forward FX market. The current forward one-year exchange rate between dollars and Turkish lira is $0.5486/TL. Calculate the return on the FI's investment portfolio (including the hedge) and the net return for the Fl over the year
