Question
North Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange risk. In a recent transaction, it issued a one-year
North Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange risk. In a recent transaction, it issued a one-year $2.40 million CD at 5 percent and is planning to fund a loan in British pounds at 8 percent for a 3 percent expected spread. The spot rate of U.S. dollars for British pounds is $1.456/1.
a. However, new information now indicates that the British pound will appreciate such that the spot rate of U.S. dollars for British pounds is $1.43/1 by year-end. Calculate the loan rate to maintain the 3 percent spread. b. The bank has an opportunity to hedge using one-year forward contracts at 1.46 U.S. dollars for British pounds. Calculate the net interest margin if the bank hedges its forward foreign exchange exposure.
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