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Acacia Bank expects the euro to
1. Interest rate on borrowed euros is 5 percent annualized
2. Interest rate on dollars loaned out is 6 percent annualized
3. Spot rate is 0.90 per dollar
4. Expected spot rate in ten days is 0.95 per dollar
5. Acacia Bank can borrow 10 million
Describe the steps Acacia should take to profit from shorting euros and going long on dollars, show your calculations.
Step by step
Solved in 3 steps
- Optimizing economic agents use the real interest rate when thinking about the economic costs and returns of a loan. Suppose the average rate paid by banks on savings accounts is 0.45% at a time when infialion is around 0 9% For the average saver, the real rate of interest on his or her savings is % (Round your response to two decimal places and use a minus sign if necessay.) Il banks expect that the rate of inflation in the coming year will be 3.9% and they want a real return of 8% on a certain category of loans, then the nominal rate they should charge borrowers on those loans is %. (Round your response to two decimal places) 11 the economy experiences an unexpectedly high rate of inflation, the group that would tend to benefit is O A. creditors (people or institutions that are owed money). O B. deblors (pcople or businesses who owe moncy). OC. both would benefit cgqually O D. neilher bencfits.A bank has made a loan charging a base lending rate of 10 percent. It expects a probability of default of 5 percent. If the loan is defaulted, it expects to recover 50 percent of its money through the sale of its collateral. What is the expected return on this loan?3. Suppose you dopiest SR 5000 in currency into your checking account at a branch of Al-Rajhi Bank, which we will assume that the required reserve ration is %10. a. Use a T-account to show the initial effect of this transaction on Al-Rajhi's balance sheet. b. Suppose that Al-Rajhi Bank makes the maximum loan it can from the fund you deposited. Use a T-account to show the the initial effect of this transaction on Al- Rajhi's balance sheet. Also include in this T-account the transaction from part (a). c. Now suppose that whoever took out the loan in part (b) writes a check for this amount and that person receiving the check deposit in Alinma Bank. Use a T-account to show the the initial effect of this transaction on Alinma's balance sheet.
- (b) Suppose that you took out PTPTN loans totalling RM24000 with interest of 1% per year. You have an online payment plan which deducts savings from your bank account at a rate of RM100 per month. (Hint: Assume that the rate is evaluated based on the current balance of the loan.) (1) Write the initial value problem for the situation above. State all variables and the quantities they represent.Optimizing economic agents use the real interest rate when thinking about the economic costs and returns of a loan. Suppose the average rate paid by banks on savings accounts is 0.65% at a time when inflation is around 1.45%. For the average saver, the real rate of interest on his or her savings is %. (Round your response to two decimal places and use a minus sign if necessary.) If banks expect that the rate of inflation in the coming year will be 4.45% and they want a real return of 5.5% on a certain category of loans, then the nominal rate they should charge borrowers on those loans is %. (Round your response to two decimal places. If the economy experiences an unexpectedly high rate of inflation, the group that would tend to benefit is O A. debtors (people or businesses who owe money) O B. creditors (people or institutions that are owed money) O C. both would benefit equally. O D. neither benefits.An investment bank can borrow or lend at LIBOR. Suppose that the 6-month rate is 5% and the 12-month rate is 8%. The rate that can be locked in for the period between 6 months and 12 months using an FRA is 7%. What arbitrage opportunities are open to the bank? All rates are continuously compounded.
- A financial institution uses a loan base rate of 4.35% and sets the credit risk premium at 6.68%. The institution charges a 1.5% loan origination fee and imposes 3.22 % compensating balances. The required reserves for this institution are 10%. Additionally suppose your institution specifies the following linear probability model to estimate the probability of default: PD = Bo - Bi Wealth-B2Credit Score + B3 Number of Bankruptcics Bo = 10, 109.5 %3D B1 = 0.10 %3D B2 = 0.20 %3D B3 = 0.60 %3D Use the information above to answer the question. What is the gross rate of return on the loan? O 9.31% O 11.03% O 12.53% O 12.90%Suppose that as a loan officer for a bank you just completed a £1 million loan to a small business. This is a senior unsecured loan, with one-year maturity and carries a 10% p.a. interest rate. You rate the borrower internally as B-, which translates into a one-year probability of default (PD) estimate of 10%. Loss given default (LGD) for the loan is estimated as 30%. Determine the expected cash flow from the loan at maturity. O a. £1,034,000 O b. £1,067,000 O c. £1,123,000A financial institution uses a loan base rate of 4.35% and sets the credit risk premium at 6.68%. The institution charges a 1.5% loan origination fee and imposes 3.22% compensating balances. The required reserves for this institution are 10%. Additionally suppose your institution specifies the following linear probability model to estimate the probability of default: PD=80-8₁ Wealth - B₂Credit Score + B3 Number of Bankruptcies Bo= 10, 109.5 8₁0.10 B₂ = 0.20 B3 = 0.60 Use the information above to answer the question. What is the gross rate of return on the loan? O 9.31% O 11.03% O 12.53% 12.90%
- GBA Company wishes to raise $5,000,000 with debt financing. The funds will be repaid with interest in 1 year. The treasurer of GBA Company is considering three sources: i. Borrow USD from Citibank at 1.50% ii. Borrow EUR from Deutsche Bank at 3.00% iii. Borrow GBP from Barclays at 4.00% If the company borrows in euros or British pounds, it will not cover the foreign exchange risk; that is, it will change foreign currency for dollars at today’s spot rate and buy foreign currency back 1 year later at the spot rate prevailing then. The GBA Company has no operations in Europe. A representative of GBA contacts a local academic to provide projections of the spot rates 1 year in the future. The academic comes up with the following table: Currency Spot Rate Projected Rate 1 Year in the Future USD/GBP 1.5 1.55 USD/EUR 0.95 0.85 What are the projected USD/GBP rate and USD/EUR rate for which the expected interest costs would be the same for the three…DEF Corporation will be needing P1,000,000 additional cash inflow. It is looking to finance this through either Bank One or Bank Zero for a period of 6 months. Bank One offers a 10% loan but requires a P20,000 bank charge. On the other hand, Bank Zero is willing to offer an 8% loan but requires P100,000 compensating balance. Which bank should DEF approach? In the space below, provide the preferred bank's simple annual cost of loan. (format: 6.67 for 6.6666%)Tyson Inc. wants to hedge an account receivable of ¥595 million to be received in six months using a money market hedge. Given a yen borrowing rate of 6% APR how much will Tyson Inc. need to borrow today in order to match the payment it will receive in six months? Question 7 options: ¥577.7 million ¥595 million ¥561.3 million ¥586.2 million