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.

Answered: Image /qna-images/answer/3dcc1aa5-7605-47b0-9a08-522b918cc4e1.jpg

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

See similar textbooks

Similar questions

McDougan Associates (USA). McDougan Associates, a U.S.-based investment partnership, borrows €80,000,000 at a time when the exchange rate is $1.3460 = €1.00. The entire principal is to be repaid in three years, and interest is 6.250% per annum, paid annually in euros. The euro is expected to depreciate vis-à-vis the dollar at 3% per annum. What is the effective cost of this loan for McDougan?
McDougan Associates (USA). McDougan Associates, a US-based investment partnership, borrows €90,000,000 at a time when the exchange rate is $1 3492/E. The entire principal is to be repaid in three years, and interest is 6.450% per annum paid annually in euros The euro is expected to depreciate vis-à-vis the dollar at 2.7% per annum. What is the effective cost of this loan for McDougan? outflow (Round the amount to the nearest whole number and the exchange rate to four decimal places) Year 11 Year 2 Proceeds from borrowing euros Interest payment due in euros Repayment of principal in year 3 Total cash flow of euro-denominated debt Year 0 €90,000,000 € ETTE 13492 (5.805.000) € (5,805,000) € 90,000.000 (5,805,000) (5,805,000) 13128 Expected exchange rate, S Dollar equivalent of euro-denominated cash flow $121.426.000 (7.620.804) $ (7.415.307) $ (119,076,034) What is the effective cost of this loan for McDougan? (Round to two decimal places) Year 3 1.2774 (5,805,000) (90,000,000) 95,005,000…
XYZ Corporation, located in the United States, has an accounts payable obligation of ¥1500 million payable in six months to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the six month forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States. a) What is the future dollar cost of meeting this obligation using the money market hedge a. $92,307. b. $ 19582168.89 c. $13054779.26 d. $ 6589854.111
Goodyear, a U.S. firm, sells tires to Airbus UK, and will receive payment of £1,000,000 in one year. Goodyear's bank quotes the information below: o The spot exchange rate is o The 1-year interest rate on dollars is ius = 2.00% e$/£ $1.50/£ %3D o The 1-year interest rate on pounds is iUK = 5.50% o The 1-year forward rate on pounds is fs/£ = $1.45/£ %3D In addition, Goodyear contacts private forecasters in the market and concludes: o The 1-year-ahead expected exchange rate on the Pound is eex £ = $1.40/£
Pfizer, an American corporation, just signed a contract to sell laboratory equipment for COVID -19 research to Bayer AG- a German corporation. Bayer AG will be billed €10 million, which is receivable in 3 months. The current spot exchange rate is $1.1290/€ and the 3-month forward rate is $1.1945/€. The U.S. annual deposit rate is 4.0% and annual U.S. borrowing rate is 8%. The annual borrowing rate at the Dresden Bank (Germany) is 8.0%. Pfizer’s cost of capital is 10% per annum. Put options on Euro are available at strike rate of $1.1960/€ and premium of 1.0%. Call options on Euro are available at strike rate of $1.1970/€ and premium of 1.5%. Pfizer is concerned with the volatile exchange rate between the dollar and the euro and would like to hedge exchange exposure. Outline how you would deal with transaction exposure. Calculate and discuss different hedging alternatives. Which alternative would you recommend? Why?
A Ghanaian multinational company is raising a one-year loan of one million pounds sterling (£ 1,000,000) from the HSCB bank of UK at 8% per annum. Prudential Bank of Ghana is offering the equivalent of the above amount in cedi at 22% per annum. The current exchange rate between the cedi and the pound is 17000cedis. Consultants to the loan indicate that there are 40%, 30% and 20% chance that the pound sterling would strengthen by 15%, 10% and 5% respectively against the cedi at the end of the year when the loan is due. Advice the Ghanaian multinational which one is cheaper.
DK Investment Co is a US firm that executes a carry trade in which it borrow euros (where interest rates are presently low) and invests in British pounds (where interest rates are presently high). DK Investment uses $100,000 of its own funds and borrow an additional euro 600,000. It will pay 0.5% on its euro borrowed for the next month and will earn 1.0% per month on funds invested in UK (British pounds). Assume the euro spot rate is $1.3/euro, British pound's spot rate is $1.8/bp (so pounds is worth 1.38 euro) and after one month, the FX rates will be the same. What will be DK Investment Net US$ profit from this carry trade investment? around $4,598 around $4,900 around $4,912 around $4,376
Currently, the USD/MXN rate is 19.5300 and the three-month forward exchange rate is 20.8400. The three-month interest rate is 3.3% per annum in the U.S. and 6.3% per annum in Mexico. Assume that you can borrow MXP10,000,000 or its equivalent in USD. How much do you make/lose if you borrow locally and invest abroad? (USD, no cents)
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%. The current spot rate of U.S. dollars for British pounds (GBP/USD) is $1.320/£1. 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?
A U.S. bank converted $1 million to Swiss francs to make a Swiss franc loan to a valued corporate customer when the exchange rate was 1.2 francs per dollar. The borrower agreed to repay the principle plus 5% interest in 1 year. The borrower repaid Swiss francs at loan maturity and when the loan was repaid the exchange rate was 1.3 francs per dollar. What was the bank's dollar rate of return? A. 26.00% B. -2.69% C. -3.08% D. 7.14%
Sun Bank USA has purchased a 8 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 $0.625/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 $1.60/£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 $0.588/A$1 and $1.848/£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)?…
Sun Bank USA has purchased a 24 million one-year Australian dollar loan that pays 15 percent interest annually. The spot rate of U.S. dollars for Australian dollars (AUD/USD) is $0.625/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 13 percent. The current spot rate of U.S. dollars for British pounds (GBP/USD) is $1.60/£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 $0.588/A$1 and $1.848/£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 $180,000 (disregarding any change in principal values)?…