Question
Liabilities & Equity Assets 20,000,000 U.S. CDs (9%) 10,000,000 U.S. loans (10%) 10,000,000 U.K. loans in sterling (15%) 20,000,000 Total 20,000,000 Total A U.S. FI
Liabilities & Equity | Assets | ||
20,000,000 | U.S. CDs (9%) | 10,000,000 | U.S. loans (10%) |
10,000,000 | U.K. loans in sterling (15%) | ||
20,000,000 | Total | 20,000,000 | Total |
A U.S. FI is raising all of its $20 million liabilities in dollars (one-year CDs) but investing 50% | |||
in U.S. dollar assets (one-year maturity loans) and 50% in U.K. pound sterling assets | |||
(one-year maturity loans). Suppose the promised one-year U.S. CD rate is 9%, to be paid | |||
in dollars at the end of the year, and that one-year, credit risk-free loans in the US. are | |||
yielding only 10%. Credit risk-free one-year loans are yielding 15% in the UK. | |||
A) What amount, in sterling, will the FI have to repatriate back to the U.S. after one year if the | |||
exchange rate remains constant at $1.55 to 1. B) What would be the weighted return on the bank's portfolio of investments ? | |||
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