question 3

Republic Bank, bank based in the USA, had bought a one-year Euro denominated loan valued at 16 million Euros. The loan pays an interest of 12 percent annually. When the purchase was done, the spot rate for Euros with the US dollar was at 1.60/$. To finance this loan, Republic Bank had obtained an equivalent value British pound denominated deposit with a maturity of one year. The interest rate on the pound denominated deposit is at 10 percent per annum. Currently, the current spot rate of the British pound with the US dollar is at $1.60/.

(i) Calculate the net interest income in dollar terms on the one-year transaction if the spot rates at the end of the year are given as 1.70/$ and $1.85/. (10 marks)

(ii) Calculate the required spot rate for the pound to dollar in order to achieve a target net interest margin of 4 percent. (10 marks