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QUESTION A1 Note: For full credit brief explanations of your calculations must be given. Part 1: Bank USA issued a one-year $2 million Certificate of
QUESTION A1 Note: For full credit brief explanations of your calculations must be given. Part 1: Bank USA issued a one-year $2 million Certificate of Deposit (CD) at 6%. The funds are used to finance a loan in euros at 8% for a corporation in France. The spot rate for the euro was 0.8557/$ (USD/EUR=0.8557) at transaction time. (a) Calculate the net interest income on the one-year loan if the spot rate at the end of the year is 0.8612/$ (USD/EUR=0.8612). (5 marks) (b) Bank USA had an opportunity to enter into one-year forward contract by selling euros at 0.86/$ (USD/EUR=0.8600). Calculate what would have been the spread on the loan if the bank had hedged its foreign currency exposure. Discuss why the Bank may choose not to hedge foreign exchange exposures. (5 marks) (c) Calculate and discuss how far can the US dollar appreciate before the transaction will result in a loss for Bank USA
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