Review for E3_ans_Fall11 - FINANCIAL INSTITUTIONS...

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FINANCIAL INSTITUTIONS MANAGEMENT REVIEW FOR EXAM 3. Problem 1. (Cost of funds) A deposit account requires a minimum balance of $800 for interest to be earned at an annual rate of 3.6 percent. An account holder has maintained an average balance of $1100 for the first 3 months and $800 for the remaining 9 months. He writes an average of 70 checks per month and pays $0.03 per check. Cost of clearing a check for the bank $0.045. The account servicing fee is 6$ per month and account maintenance costs are 50$ per year. The minimum reserve requirements are 8%, float is 5%. What average return does the account holder earn on the account? Solution: Average account size per year = 1100 x 0.25 + 800 x 0.75 = 875 Return = (50 + 1100 x 0.036 x 0.25 + 800 x 0.036 x 0.75 - 72 + 70(0.045 – 0.03)x12) / 875 x (1-0.08) (1-0.05) = (50 + 9.9 + 21.6 – 72 +73.5) / 830.3 = 22.1/764.75 = 2.88% Problem 2. (Foreign exchange risk and Hedging) . A Bank has been borrowing in the U.S. markets and lending abroad, thus incurring foreign exchange risk. In a recent transaction, it issued a one-year $10 million CD at 3% and funded a loan in Swiss Francs at 6 %. The spot rate for the Swiss Franc was SF 1.45/$ at the time of the transaction. a. Information received immediately after the transaction closing indicated that the Swiss Franc will depreciate to SF1.47/$ by year-end. If the information is correct, what will be the return on your investments? Assume adjustments in principal value are included in the spread. Net return = $0.155/10,000,000 = 0.0155 or 1.55% b. The bank has an opportunity to sell one-year forward SF at SF1.46. What will be the return on your investments if the bank had hedged forward its foreign exchange exposure? Net return = .227397/10 = 0.0227, or 2.27 % c. What would have been an appropriate change in loan rates to maintain the 3% spread if the bank intended to hedge its exposure using the forward rates? The bank should increase the rates to
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This note was uploaded on 12/04/2011 for the course FIN 3230 taught by Professor Olgapak during the Spring '11 term at Kazakhstan Institute of Management, Economics and Strategic Research.

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Review for E3_ans_Fall11 - FINANCIAL INSTITUTIONS...

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