Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
Sun Bank USA has purchased a 16 million one-year Australian dollar loan that pays 12 percent interest annually
Sun Bank USA has purchased a 16 million one-year Australian dollar loan that pays 12 percent interest annually. The spot rate of U.S. dollars for Australian dollars (AUD/USD) is $0.757/A$1. It has funded this loan by accepting a British pound (BP)-denominated deposit for the equivalent amount and maturity at an annual rate of 10 percent. The current spot rate of U.S. dollars for British pounds (GBP/USD) is $1.320/£1.
a) What is the net interest income earned in dollars on this one-year transaction if the spot rate of U.S. dollars for Australian dollars and U.S. dollars for BPs at the end of the year are $0.715/A$1 and $1.520/£1, respectively? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your final answer to the nearest whole number. (e.g., 32))
b) What should the spot rate of U.S. dollars for BPs be at the end of the year in order for the bank to earn a net interest income of $200,000 (disregarding any change in principal values)? (Round your answer to 5 decimal places. (e.g., 32.16161))
Expert Solution
a) Computation of the net interest income:-
Loan amount = 16,000,000 * 0.757
= 12,112,000
Deposit amount = Loan amount / Current spot rate
= 12,112,000 / 1.320
= $9,175,757.58
Interest income at end of year = Loan amount * Interest rate
= 12,112,000 * 12%
= $1,453,440
Interest expense at end of year = Deposit amount * Annual rate
= $9,175,757.58 * 10%
= $917,575.76
Net interest income = Interest income at end of year - Interest expense at end of year
= $1,453,440 - $917,575.76
= $535,864.24
b) Computation of the spot rate of U.S. dollars for BPs:-
Interest expenses = Ending interest income - Net interest income
= $1,453,440 - $200,000
= $1,253,440
Spot rate = Interest expenses / Ending interest expense
= $1,253,440 / $917,575.76
= 1.36603
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
