Problem. A bank purchased 5 million one-year Swiss Franc loan that pays 6 percent interest annually.The spot rate of U.S. dollars for Swiss Franks (CHF/USD) is 1.0175. The loan is funded by accepting a Canadian Dollad (C$) denominated deposit for the equivalent amount and matuity at an annual rate of 4%. The current spot rate of USD/C$ is 0.7710.

One year later:

(a) What is the net interest income earned in dollars next year if the spot rate for USD/CHF is 1.0310 and USD/C$ is 0.7680?

(b) What should the spot rate of USD/C$ be in order for the bank to earn a net interest income of $108,000? USD/CHF rate is the same as in part (a).

DISREGARD ANY CHANGE IN PRINCIPAL VALUES (assume the loan will continue for years and we are only looking at interest payments for next year)

Amount of Swiss franc loan Rate on Swiss franc loan spot rate 5,000,000 CHF 6% 1.0175 $/CHF Rate on Canadian deposits (to be repaid) spot rate $/C$ One year later: exchange rate $/CHF exchange rate $/C$ $/CHF $/C$ part (a) At the beginning: US Dollar amount of Swiss loan This amount in Canadian $ One year later: Interest you have to pay Candian depositors This amount in dollars CHF interest received from loan This amount in dollars Net interest to the bank part (b) CHF interest received from loan This amount in dollars Desired net interest income Cost of Candian deposit in $ Interest you have to pay depositors Exchange rate $/C$ Amount of Swiss franc loan Rate on Swiss franc loan spot rate 5,000,000 CHF 6% 1.0175 $/CHF Rate on Canadian deposits (to be repaid) spot rate $/C$ One year later: exchange rate $/CHF exchange rate $/C$ $/CHF $/C$ part (a) At the beginning: US Dollar amount of Swiss loan This amount in Canadian $ One year later: Interest you have to pay Candian depositors This amount in dollars CHF interest received from loan This amount in dollars Net interest to the bank part (b) CHF interest received from loan This amount in dollars Desired net interest income Cost of Candian deposit in $ Interest you have to pay depositors Exchange rate $/C$