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FIM bank of Adelaide purchased a 32 million euro one-year loan that pays 10 per

cent interest annually. The spot rate for euro is 1.50/$1. FIM Bank has funded this

loan by accepting a UK pound-(GBP) denominated deposit for the equivalent

amount and maturity at an annual rate of 8 per cent. The current spot rate of the

UK pound is $1.50/1. (1.5 marks)

a) What is the net interest income earned in dollars on this one-year transaction if

the spot rates at the end of the year are 1.60/$1 and $1.75/1?

b) What should be the GBP to AUD spot rate in order for the bank to earn a net

interest margin of 3 per cent?

c) Does your answer to part (b) imply that the dollar should appreciate or

depreciate against the pound?