Question 1 part a: A US Bank has demand deposits whereby they pay a rate of interest. The bank makes loans to US, UK, and EU clients at a 33% split. The situation is as follows: - What is the ROA if there is no change in FX rates - What is the COF if there is no change to FX rates - What is the ROI if there is no change to FX rates?

part b: Suppose FX rates move to the following and the balance sheet is UNHEDGED. - What is the ROA if the balance sheet is unhedged? - What is the COF if the balance sheet is unhedged? - What is the ROI if the balance sheet is unhedged?

part c: Create an on balance sheet hedge. What are the amounts that would go in the red box? Explain/describe what the means (i.e. what does it mean that we borrow USD, GBP, Euro). Where do we get those funds, where do they come from and what is the problem with doing the on balance sheet hedge?

part d: Suppose the bank was able to lock in a forward rate in the derivatives market and complete an off balance sheet hedge. What would the new ROA, COF, and ROI be? Use the old vs. new FX change from part A. Assets (loans) Liabilities (CDs) Invest @ Borrow @ $100.00 US USD @ 9% $300.00 US USD @ 8% $100.00 UK GBP @ 15% $0.00 UK GBP @ 11% $100.00 EU Euro @ 18% $0.00 EU Euro @ 10% Start (USD/GBP) $1.50 Start (USD/Euro) $1.20 End (USD/GBP) $1.50 End (USD/Euro) $1.20 Start (USD/GBP) $1.50 Start (USD/Euro) $1.20 End (USD/GBP) $1.35 End (USD/Euro) $1.10 Assets (loans) Liabilities (CDs) Invest @ Borrow @ $100.00 US USD @ 9% US USD @ 8% $100.00 UK GBP @ 15% UK GBP @ 11% $100.00 EU Euro @ 18% EU Euro @ 10% Forward USD/GBP $1.45 Forward USD/Euro $1.15