Zongo Industrial Banks, a U.S. bank, has 1-year U.S. $300 million loan that earns anaverage rate of return of 6%. Forrest Gump Bank also has one year single payment Euroloans of €110 million earning 8%. Forrest Gump Bank's funding source is $400 millionin US$ one year NCDS, on which they are paying 4%. Initially the exchange rate is €1.10per $1 U.S. The one year forward rate is €1.14 per $1 U.S. What is the bank's dollar %spread if they hedge fully using Euro forwards?Note: For this questions, you MUST show detailed calculation as we did in the class.That is, show the formula and substitution.

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Answered: per $1 U.S. The one year forward rate…

per $1 U.S. The one year forward rate is €1.14 per $1 U.S. What is the bank's dollar % spread if they hedge fully using Furo forwards?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Zongo Industrial Banks, a U.S. bank, has 1-year U.S. $300 million loan that earns an
average rate of return of 6%. Forrest Gump Bank also has one year single payment Euro
loans of €110 million earning 8%. Forrest Gump Bank's funding source is $400 million
in US$ one year NCDS, on which they are paying 4%. Initially the exchange rate is €1.10
per $1 U.S. The one year forward rate is €1.14 per $1 U.S. What is the bank's dollar %
spread if they hedge fully using Euro forwards?
Note: For this questions, you MUST show detailed calculation as we did in the class.
That is, show the formula and substitution.

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