Suppose that a U.S. FI has

Assets

$300 million U.S. loans (1-yr) in dollars (6%)

$200 million U.S. CDs (1-yr) in dollarsv (4%)

Liabilities

$200 million equivalent German loans (1-yr) in euros (10%)

$300 million equivalent Japanese CDs (1-yr) in yen (3%)

The exchange rate of dollars for euros at the beginning of the year is $1.10/1, and the exchange rate of dollars for Japanese yen at the beginning of the year is $0.009/1.

i.Calculate the net interest margin for the FI if the spot foreign exchanges become $1.00/1 and $0.010/1.

ii.Comparing to an unhedged position (your answer in part i), would you prefer to enter to a set of future contracts that trade your foreign assets and liabilities at $1.15/1 and $0.011/1.