Question
Suppose that a U.S FI has the following assets and liabilities: ASSETS: $500 million U.S loans (one year) in dollars. : $300 million equivalent U.K
Suppose that a U.S FI has the following assets and liabilities:
ASSETS: $500 million U.S loans (one year) in dollars.
: $300 million equivalent U.K loans (one year) (loans made in pounds)
: $200 million equivalent Turkish lira (one year) (loans made in Turkish lira)
LIABILITIES: $1000 million U.S CD's (one year) in dollars
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 $1.6/1, and the exchange rate of dollars for Turkish lira (TL) at the beginning of the year is $0.5533/TL1.
1. Calculate the dollar proceeds from the FI's loan portfolio at the end of the year, the return on the FI's loan portfolio, and the net return for the FI if the spot foreign exchange rate has not changed over the year. [10 marks]
2. Calculate the dollar proceeds from the FI's loan portfolio at the end of the year, the return on the FI's loan portfolio, and the net return for the FI if the pound spot foreign exchange rate falls to $1.45/1 and the lira spot foreign exchange rate falls to $0.52/TL1 over the year. [10 marks]
3. Calculate the dollar proceeds from the FI's loan portfolio at the end of the year, the return on the FI's loan portfolio, and the net return for the FI if the pound spot foreign exchange rate rises to $1.70/1 and the lira spot foreign exchange rate rises to $0.58/TL1 over the year. [10 marks]
4. Suppose that instead of funding the $300 million investment in 8 percent British loans with U.S. CDs, the FI manager funds the British loans with $300 million equivalent one-year pound CDs at a rate of 5 percent and that instead of funding the $200 million investment in 10 percent Turkish loans with U.S. CDs, the FI manager funds the Turkish loans with $200 million equivalent one-year Turkish lira CDs at a rate of 6 percent. What will the FI's balance sheet look like after these changes have been made? [10 marks]
5. Using the information in part 4, calculate the return on the FI's loan portfolio, the average cost of funds, and the net return for the FI if the pound spot foreign exchange rate falls to $1.45/1 and the lira spot foreign exchange rate falls to $0.52/TL1 over the year. [10 marks]
6. Using the information in part 4, calculate the return on the FI's loan portfolio, the average cost of funds, and the net return for the FI if the pound spot foreign exchange rate rises to $1.70/1 and the lira spot foreign exchange rate falls to $0.58/TL1 over the year. [10 marks]
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started