Question Three Total 16 marks Suppose that a U.S. Fl has the following assets and liabilities: Assets Liabilities $250 million U.S. loans (one year) (6%) $500 million U.S. CDs (one year) (4%) Loans made in dollars: $ in dollars: $ $150 million equivalent U.K. loans (one year) (8%) Loans made in pounds: $100 million equivalent Turkish loans (one year) (10%) Loans made in Turkish lira: TL The promised one-year U.S. CD rate is 4 percent, to be paid in dollars at the end of the year, the one-year default risk-free loans are yielding 6 percent in the United States, one-year default risk-free loans are yielding 8 percent in the United Kingdom, and one-year default risk-free loans are yielding 10 percent in Turkey. The exchange rate of dollars for pounds at the beginning of the year is $1.3/1, and the exchange rate of dollars for Turkish lira at the beginning of the year is $0.1664/TL1. Required: a. Calculate the dollar proceeds from the Fl's loan portfolio at the end of the year, the return on the Fl's loan portfolio, and the net return for the Fl if the pound spot foreign exchange rate falls to $1.20/1 and the lira spot foreign exchange rate falls to $0.156/TL1 over the year. (5 marks) b. Calculate the dollar proceeds from the Fl's loan portfolio at the end of the year, the return on the Fl's loan portfolio, and the net return for the Fl if the pound spot foreign exchange rate rises to $1.40/1 and the lira spot foreign exchange rate rises to $0.17/TL1 over the year. (3 marks) C. Suppose that the Fl funds the $250 million U.S. loans with $250 million one-year U.S. CD at a rate of 4 percent; funds $150 equivalent British loans with $150 million equivalent one-year pound CDs at a rate of 5 percent; funds $100 million equivalent Turkish loans with $100 million equivalent one-year Turkish lira CDs at a rate of 6 percent. Assume no other changes. What will the Fl's balance sheet look like after these changes have been made? (2 marks) d. Using the information in part'c' above, calculate the return on the Fl's loan portfolio, the average cost of funds, and the net return for the Fl if the pound spot foreign exchange rate falls to $1.20/1 and the lira spot foreign exchange rate falls to $0.156/TL1 over the year. (6 marks) Question Three Total 16 marks Suppose that a U.S. Fl has the following assets and liabilities: Assets Liabilities $250 million U.S. loans (one year) (6%) $500 million U.S. CDs (one year) (4%) Loans made in dollars: $ in dollars: $ $150 million equivalent U.K. loans (one year) (8%) Loans made in pounds: $100 million equivalent Turkish loans (one year) (10%) Loans made in Turkish lira: TL The promised one-year U.S. CD rate is 4 percent, to be paid in dollars at the end of the year, the one-year default risk-free loans are yielding 6 percent in the United States, one-year default risk-free loans are yielding 8 percent in the United Kingdom, and one-year default risk-free loans are yielding 10 percent in Turkey. The exchange rate of dollars for pounds at the beginning of the year is $1.3/1, and the exchange rate of dollars for Turkish lira at the beginning of the year is $0.1664/TL1. Required: a. Calculate the dollar proceeds from the Fl's loan portfolio at the end of the year, the return on the Fl's loan portfolio, and the net return for the Fl if the pound spot foreign exchange rate falls to $1.20/1 and the lira spot foreign exchange rate falls to $0.156/TL1 over the year. (5 marks) b. Calculate the dollar proceeds from the Fl's loan portfolio at the end of the year, the return on the Fl's loan portfolio, and the net return for the Fl if the pound spot foreign exchange rate rises to $1.40/1 and the lira spot foreign exchange rate rises to $0.17/TL1 over the year. (3 marks) C. Suppose that the Fl funds the $250 million U.S. loans with $250 million one-year U.S. CD at a rate of 4 percent; funds $150 equivalent British loans with $150 million equivalent one-year pound CDs at a rate of 5 percent; funds $100 million equivalent Turkish loans with $100 million equivalent one-year Turkish lira CDs at a rate of 6 percent. Assume no other changes. What will the Fl's balance sheet look like after these changes have been made? (2 marks) d. Using the information in part'c' above, calculate the return on the Fl's loan portfolio, the average cost of funds, and the net return for the Fl if the pound spot foreign exchange rate falls to $1.20/1 and the lira spot foreign exchange rate falls to $0.156/TL1 over the year. (6 marks)
