Integrated Mini Case Foreign Exchange Risk Exposure Suppose that a US. 1 has the following assets and 4. Suppose that instead of funding the $300 million liabilities: investment in 8 percent British loans with US. CDs, the Fl manager funds the British loans with \$300 milliol equivalent one year pound CDs at a rate of 5 percent and that instead of funding the $200 million investment in 10 percent Turkish loans with U.S. CDS, the FI manager funds the Turkish loans with $200 million equivalent oneyear Turkish lira CDs at a rate of 6 percent. What will the FI's balance sheet look like after these changes have been made? 5. Using the information in part 4, calculate the return on the FI's loan portfolio, the average cost of funds, and the net return for the Fl if the pound spot foreign exchange rate falls to The promised one-year U.S. CD rate is 4 percent, to $1.45/A1 and the lin spot foreign exchange rate be paid in dollars at the end of the year; the one- falls to 50.52/L over the year. year, default risk-free loans are yielding 6 percent in the United States, one year default risk-free loans are yiclding 8 percent in the United Kingdom; and return on the FI's loan portfolio, the average one year default risk-free loans are yielding 10 per-_ cost of funds, and the net return for the Fl if cent in Turkey. The exchange rate of dollars for the pound spot foreign exchange rate rises to pounds at the beginning of the year is $1.6/E1. and $1.70/E1 and the lira spot foreign exchange rate the exchange rate of dollars for Turkish lira at the falls to S0.58/TL over the year. beginning of the year is $0.5533/TL 7. Suppose that instead of funding the $300mil 1. Calculate the dollar proceeds from the FI's loan CDS investment in 8 percent British loans with CD issued in the United Kingdom, the F 1 manportfolio at the end of the year, the return on ager hedges the foreign exchange risk on the the F's loan portfolio, and the net return for British loans by immediately selling its expected the F1 if the spot foreign exchange rate has not one-year pound loan proceeds in the forward EX changed over the year. market. The current forward one year exchange 2. Calculate the dollar proceeds from the F's loan rate between dollars and pounds is $1.53/E1. portfolio at the end of the year, the return on the Additionally, instead of funding the $200mil FI's loan portfolio, and the net retum for the F1 lion investment in 10 percent Turkish loans with If the pound spot foreign exchange rate falls to CDs issued in the Turkey, the Fl manager hedges \$1.45/E1 and the lira spot foreign exchange rate the foreign exchange risk on the Turkish loans falls to 50.52/TL over the year. by immediately selling its expected one year lira 3. Calculate the dollar proceeds from the Fr's loan loan proceeds in the forward FX markec. The curportfolio at the end of the year, the retum on the rent forward one-year exchange rate between F's loan portfolio, and the net retum for the F dollars and Turkish lira is S0.5486/TL Calcu If the pound spot foreign exchange rate rises to late the return on the Fl's investment portfolio $1.70/Cl1 and the lira spor foreign exchange rate (including the hedge) and the net return for the rises to 5058/TL over the year. Flover the year
