Solution

1. Convert the euro loan to U.S. dollars at inception

   • €16.0 million × $1.10/€ = $17.6 million

2. Determine the pound-denominated deposit amount

   • The bank funds the loan with the equivalent amount in pounds:
   • £ amount = $17.6 million / $1.60 per £ = £11.0 million

3. Compute end-of-year asset value in dollars

   • Euro loan grows to €16.0 million × 1.07 = €17.12 million
   • Convert at end-of-year exchange rate $1.00/€:
   • Asset value = $17.12 million

4. Compute end-of-year liability value in dollars

   • Pound deposit grows to £11.0 million × 1.05 = £11.55 million
   • Let the end-of-year spot rate be x dollars per pound
   • Liability value = 11.55x million dollars

5. Set net interest margin equal to 2.0%

   • Net interest income = Assets − Liabilities = 17.12 − 11.55x
   • NIM = Net interest income / earning assets
   • Use initial earning assets of $17.6 million:
   $$\frac{17.12 - 11.55x}{17.6} = 0.02$$ $$17.12 - 11.55x = 0.352$$ $$11.55x = 16.768$$ $$x \approx 1.45$$

6. Nearest answer

   • $1.50 per £1

Final Answer

B. $1.50