Saunders 87 An FI has purchased borrowed a one year 10 million

# Saunders 87 an fi has purchased borrowed a one year

• Test Prep
• 74
• 94% (17) 16 out of 17 people found this document helpful

This preview shows page 66 - 70 out of 74 pages.

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 Accessibility: Keyboard Navigation 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 Accessibility: Keyboard Navigation 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. Accessibility: Keyboard Navigation 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.  • • • 