Saunders - Chapter 13 #86

87.
An FI has purchased (borrowed) a one-year $10 million Eurodollar deposit at an annual
interest rate of 6 percent. It has invested these proceeds in one-year Euro (€) bonds at an
annual rate of 6.5 percent after converting them at the current spot rate of €1.75/$. Both
interest and principal are paid at the end of the year.
What is the spread earned by the bank if the end-of-year exchange rate is €1.77/$?
A.
-1.00 percent.
B.
-0.70 percent.
C.
-0.25 percent.
D.
0.00 percent.
E.
0.20 percent.
Dollar cost of borrowings =
[($10,000,000 × 1.06) × ($1/€1.75)] = $10,600,000
Dollar amount of €bonds = $10,000,000 × (€1.75/$1) = €17,500,000
Dollar amount of €bonds and interest =
[(€17,500,000 × 1.065) × ($1/€1.75)] = €18,637,500 × 0.564972 ≈ $10,529,665
Dollar spread = (10,529,665 - 10,600,000)/10,000,000 ≈ -0.00703
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Learning Objective: 13-03 Calculate an FIs net foreign exchange exposure.
Saunders - Chapter 13 #87

88.
An FI has purchased (borrowed) a one-year $10 million Eurodollar deposit at an annual
interest rate of 6 percent. It has invested these proceeds in one-year Euro (€) bonds at an
annual rate of 6.5 percent after converting them at the current spot rate of €1.75/$. Both
interest and principal are paid at the end of the year.
What is the spread earned if the bank can sell one-year forward Euros at €1.755/$?
A.
-0.70 percent.
B.
-0.25 percent.
C.
0.00 percent.
D.
0.20 percent.
E.
0.50 percent.
Dollar cost of borrowings =
[($10,000,000 × 1.06) × ($1/€1.75)] = $10,600,000
Dollar amount of €bonds = $10,000,000 × (€1.75/$1) = €17,500,000
Dollar amount of €bonds and interest converted at forward rate =
[(€17,500,000 × 1.065) × ($1/€1.755] = €18,637,500 × 0.5698 ≈ $10,620,000
Dollar spread = (10,620,000 - 10,600,000)/10,000,000 ≈ 0.0020
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Learning Objective: 13-03 Calculate an FIs net foreign exchange exposure.
Saunders - Chapter 13 #88
89.
An FI has purchased (borrowed) a one-year $10 million Eurodollar deposit at an annual
interest rate of 6 percent. It has invested these proceeds in one-year Euro (€) bonds at an
annual rate of 6.5 percent after converting them at the current spot rate of €1.75/$. Both
interest and principal are paid at the end of the year.
At what one-year forward rate will the bank earn a 1 percent spread?
A.
€1.7344/$.
B.
€1.7418/$.
C.
€1.7478/$.
D.
€1.7750/$.
E.
€1.7842/$.
To earn a 1 percent spread, the dollar equivalent conversion should be $10,700,000
Dollar spread = (10,700,000 - 10,600,000)/10,000,000 = 0.01
Forward rate needs to be €18,637,500/$10,700,000 = €1.7418/$1.
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Learning Objective: 13-03 Calculate an FIs net foreign exchange exposure.

Saunders - Chapter 13 #89
90.
An FI has purchased (borrowed) a one-year $10 million Eurodollar deposit at an annual
interest rate of 6 percent. It has invested these proceeds in one-year Euro (€) bonds at an
annual rate of 6.5 percent after converting them at the current spot rate of €1.75/$. Both
interest and principal are paid at the end of the year.
Assume that instead of investing in Euro bonds at a fixed rate of 6.5 percent, it invests them in
variable rates of LIBOR + 1.5 percent, reset every six months. The current LIBOR rate is 5
percent. What is the annual spread earned by the bank if LIBOR at the end of six months is
5.5 percent? Assume both interest and principal will be reinvested in six months. Assume the
exchange rate remains at €1.75/$at the end of the year.
A.
0.50 percent.