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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 $1.40 million CD at 5 percent and is planning to fund a loan in British pounds at 9 percent for a 4 percent expected spread. The spot rate of U.S. dollars for British pounds is $1.4540/1. 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 $1.4300/E1 by year-end. Calculate the loan rate to maintain the 4 percent spread? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) Loan rate b. The bank has an opportunity to hedge using one-year forward contracts at 1.4600 U.S. dollars for British (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) Net interest margin c. Calculate the loan rate to maintain the 4 percent spread if the bank intends to hedge its exposure using the forward rates? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) Loan rate
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