Q7 (10 points) Suppose that a U.S. FI has the following assets and liabilities: Liabilities Assets $700 million $1,000 million U.S. loans (one year) U.S. CDs (one year) in dollars n dollars $300 million equivalent German loans (one year) loans made in euros) The promised one-year U.S. CD rate is 3 percent, to be paid in dollars at the end of the year, the one-year, default risk-free loans are yielding 5 percent in the United States, and one-year, default risk-free loans are yielding 6 percent in Germany. The exchange rate of dollars for euros at the beginning of the year is $1.15/1 Calculate the dollar proceeds from the German loan at the end of the year, the return on the FI's investment portfolio, and the net return for the FI if the spot foreign exchange rate falls to $1.05/1 over the year a. b. Suppose that instead of funding the $300 million investment in 6 percent German loans with U.S. CDs, the FI manager funds the German loans with $300 million equivalent one-year euro CDs at a rate of 4 percent. Calculate the return on the FI's investment portfolio, the average cost of funds, and the net return for the FI if the spot foreign exchange rate falls to $1.05/1 over the year Suppose that instead of funding the $300 million investment in 6 percent German loans with CDs issued in Germany, the FI manager hedges the foreign exchange risk on the c. German loans by immediately selling its expected one-year curo loan proceeds in the forward FX market. The current forward one-year exchange rate between dollars and euros is $1.10E1. Calculate the return on the FI's investment portfolio (including the hedge) and the net retum for the Fl over the year. Will the net return be affected by changes in the dollar for euro spot foreign exchange rate at the end of the year? Q7 (10 points) Suppose that a U.S. FI has the following assets and liabilities: Liabilities Assets $700 million $1,000 million U.S. loans (one year) U.S. CDs (one year) in dollars n dollars $300 million equivalent German loans (one year) loans made in euros) The promised one-year U.S. CD rate is 3 percent, to be paid in dollars at the end of the year, the one-year, default risk-free loans are yielding 5 percent in the United States, and one-year, default risk-free loans are yielding 6 percent in Germany. The exchange rate of dollars for euros at the beginning of the year is $1.15/1 Calculate the dollar proceeds from the German loan at the end of the year, the return on the FI's investment portfolio, and the net return for the FI if the spot foreign exchange rate falls to $1.05/1 over the year a. b. Suppose that instead of funding the $300 million investment in 6 percent German loans with U.S. CDs, the FI manager funds the German loans with $300 million equivalent one-year euro CDs at a rate of 4 percent. Calculate the return on the FI's investment portfolio, the average cost of funds, and the net return for the FI if the spot foreign exchange rate falls to $1.05/1 over the year Suppose that instead of funding the $300 million investment in 6 percent German loans with CDs issued in Germany, the FI manager hedges the foreign exchange risk on the c. German loans by immediately selling its expected one-year curo loan proceeds in the forward FX market. The current forward one-year exchange rate between dollars and euros is $1.10E1. Calculate the return on the FI's investment portfolio (including the hedge) and the net retum for the Fl over the year. Will the net return be affected by changes in the dollar for euro spot foreign exchange rate at the end of the year
