Integrated Mini Case Foreign Exchange Risk Exposure Suppose that a US. F has the following assets and liabilities: 4. Suppose that instead of funding the $300 million investment in 8 percent British loans with US CDs, the FI manager funds the British loans witl $300 million equivalent one-year pound CDs at, rate of 5 percent and that instead of funding thir $200 million investment in 10 percent Turici hn loans with US, CDS, the F manager funds the Turkish loans with 5200 million equivalent one. year Turkish lira CDs at a rate of 6 percent. Whar will the Fis 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 FI if The promised one-year US. CD rate is 4 percent, to the pound spot foreign exchange rate falls to be paid in dollars at the end of the year, the one- 51.45/El and the lira spot foreign exchange rate year, default risk-free loans are yielding 6 percent falls to 50.52TL over the year. one-year default risk-free loans are yielding 10 per-_ cost of funds, and the net retum for the FI 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/E. and $1.70/E1 and the lira spot foreign exchange rate the exchange rate of dollars for Turkish lira at the falls to 5058/TL over the year. beginning of the year is S0.5533/TL 7. Suppose that instead of funding the 5300mil 1. Calculate the dollar proceeds from the Fis loan lion investment in 8 percent British loans with portfolio at the end of the year, the return on S CD issued in the United Kingdom the FI man: the Fi's loan portfolio, and the net return for 9 ager hedges the foreign exchange risk on the the Fl if the spot foreign exclange rate has not 3 British lains by immedotely selling its expected changed over the year; 2. Calculate the dollar proceeds from the Fls loan market. The current forward one year exchange Fi's loan portolio, and the net return for the FI Addirionally. instead of funding the $200 mil If the pound spot foreign exchange rate falls to . lion irvestmeri in 10 percent Turkish loans with. \$1 45/61 and the lira spor foreign exchange rave CDs issued in the Turkey, the F manager hedges falls to 50.52/IL over the year. the foreign exchange risk on the Turkish loans 3. Calculate the dollar proceeds from the Fis loan by immediately selling its expecred one-year itra portolio at the end of the year, the recura on the _. loan proceris in the firward FX murkec. The curFrs loan portiolio, and the net retum for the F rent forward one-year exchange rate between if the pound spot foreign exchange rate rises to fotars and Turkish lira is S05486/TL. Calcu 51.70/EI and the lira spor foreign exchange rate (including the on the Frs investment portfolio rises in 50.58/7. over the year F over the yeur
