Q-2 (502.2). Suppose that a U.S. financial institution has $200.0 million in assets at the start of the year. Half of its assets are invested domestically in US loans, while the other $100.0 million is invested abroad in the United Kingdom. The (default risk-free) US loans yield 4.0%, and the (default-free) loans in the United Kingdom, which denominated in pound sterlings, yield 10.0%:

Assets (loans)	Liabilities (CDs)
Invest:	Lend:
$100.0 US $ @ 4%	$100.0 US $ @ 3%
$100.0 UK £ @ 10%	$100.0 UK £ @ 6%
(loans made in pounds)	(deposits made in pounds)

This institution employs what Saunders calls an "on-balance sheet hedge;" it hedges by matching the maturity and currency of its foreign asset-liability book. The promised one-year U.S. CD rate is 3.0%, to be paid in dollars at the end of the year. The institution funds the British loans with $100.0 million equivalent one-year pound CDs at a rate of 6.0%. The exchange rate of dollars for pounds at the beginning of the year is $1.60/£1; i.e., GBPUSD is $1.60. At the end of the year, assume the pound sterling plummets (depreciates) against the dollar to $1.20. Which is nearest to the implied net interest margin? (Note: variation on Saunders' Question #16)