Question #3 (30%)

Minneapolis-based Norwest Bank has granted a 3-year fixed interest dollar denominated loan in the amount of US$ 25 million to US-based Water Irrigation Systems Inc. for a major export sale to Danang Mutual-a large farming cooperative in central Vietnam.

1. Is Norwest exposed to currency risk? What is the nature of its exposure? 2. The loan is extended with recourse to Water Irrigation Systems, which has a solid AA credit rating. Is Norwest protected against exchange rate risk?

3. Should the interest rate charged by Norwest Bank reflect exchange rate risk? Should other risk(s) be considered?