Question
Suppose that a U.S. FI has the following assets and liabilities: Assets Liabilities $400 million U.S. loans (one year) in dollars $500 million U.S. CDs
Suppose that a U.S. FI has the following assets and liabilities:
Assets | Liabilities |
$400 million U.S. loans (one year) in dollars | $500 million U.S. CDs (one year) in dollars |
$100 million equivalent German loans (one year) (loans made in euros) |
|
The promised one-year U.S. CD rate is 2 percent, to be paid in dollars at the end of the year; one-year, default riskfree loans in the United States are yielding 4 percent; and default riskfree one-year loans are yielding 5 percent in Germany. The exchange rate of dollars for euros at the beginning of the year is $1.25/1.
Calculate the net interest margin for the FI if the spot foreign exchange rate falls to $1.15/1 over the year.
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