Suppose that instead of funding the $300 million investment in 8 percent British loans with CDs issued

Question:

Suppose that instead of funding the $300 million investment in 8 percent British loans with CDs issued in the United Kingdom, the FI manager hedges the foreign exchange risk on the British loans by immediately selling its expected one-year pound loan proceeds in the forward FX market. The current forward one-year between dollars and pounds is $1.53/£1. Additionally, instead of funding the $200 million investment in 10 percent Turkish loans with CDs issued in the Turkey, the FI manager hedges the foreign exchange risk on the Turkish loans by immediately selling its expected one-year lira loan proceeds in the forward FX market. The current forward one-year between dollars and Turkish lira is $0.5486/TRY1. Calculate the return on the FI€™s investment (including the hedge) and the net interest margin for the FI over the year.

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 in the United States are yielding 6 percent; default risk€“free one-year loans are yielding 8 percent in the United Kingdom; and default risk€“free one-year 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 at the beginning of the year is $0.5533/TRY1.

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars... Portfolio
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