South Bank Credit Union has been borrowing in the US markets and lending abroad, thereby incurring

foreign exchange rate risk. In a recent transaction, it issued a one year $5 million CD at four

percent interest and is planning to use the money to fund a loan in Japanese yen at 6 percent

interest for a 2 percent expected spread. The current spot rate of US dollars to yen is

$0.00950 per yen. Please answer the following:

a.

New information now indicates that the yen will appreciate such that the spot rate of

US dollars to yen is $0.009483 per yen by year end. What should the bank charge on

the loan in order to maintain the 2 percent spread?

b.

The bank has an opportunity to hedge using one year forward contracts at $0.009493

per yen. What is the spread if the bank hedges its forward foreign exchange

exposure?

c.

How should the loan rates be increased to maintain the 2 percent spread if the bank

intends to hedge its exposure using the forward rates?