Question 193.1. A U.S. bank raises $200 million in liabilities that pay an interest rate of 4.0% in order to fund two investments: $100 million invested into U.S. dollar-denominated assets and the remaining $100 million invested into Euro (EUR) denominated assets. The expected net (of default risk) yield on the USD assets is 6.0%, and the net yield on the EUR assets is 8.0%. In this way, the expected return on the investment (ROI) is 3.0% as the difference between the blended ROA of 7.0% (average of 6.0% and 8.0%) and the cost of funds (COF) of 4.0%. However, the bank is un-hedged with respect to currency risk. At the beginning of the year, the exchange rate is EUR/USD $1.40. At the end of the year, the exchange rate has moved to EUR/USD $1.26. The nominal returns for the year were exactly as expected.

What is the one-year realized ROI if we account for the currency shift? Note: please assume all interest rates are effective annual rates (EARs), consistent with Saunders' illustrations in the assigned readings. For example, an effective annual rate of 8.0% is equivalent to 8.0% per annum with (discrete) annual compounding.