Explanation:
Step-by-step solution:
Euro loan interest income (in dollars at year-end):
$1.00/€): €1.12M × $1.00 = $1.12MCalculate dollar amount of loan at start:
$1.10/€ = $17.6M (this is the bank's asset base)Calculate pound deposit principal:
$17.6M / $1.60/£ = £11.0MRequired net interest income for 2.0% NIM:
$17.6M × 2.0% = $0.352MRequired interest expense in dollars:
$1.12M − $0.352M = $0.768MPound interest expense:
Solve for required GBPUSD spot rate:
$0.768M / £0.55M = $1.3964/£ ≈ $1.40The answer is (a) $1.40 per £1.
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Q-1 (502.1). Sun Bank USA purchased a 16.0 million one-year euro loan that pays 7.0% interest annually. The spot rate of U.S. dollars per euro is $1.10. Sun Bank has funded this loan by accepting a British pound-denominated deposit for the equivalent amount and maturity at an annual rate of 5.0%. The current spot rate of U.S. dollars per British pound is $1.60. At the end of the year, assume the euro depreciates such that the spot rate of U.S. dollars per euro falls to $1.00. Which is nearest to the required spot rate of U.S. dollars per British pound at the end of the year in order for the bank to earn a net interest margin of 2.0%? (Note: this is a variation on Saunders' Question #11)
A
a) $1.40 per £1; i.e., GBPUSD
B
b) $1.50
C
c) $1.60
D
d) $1.70
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