Question

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)? **(Round your answer to 5 decimal places. (e.g.,
32.16161))**

Answer #1

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**Answer:**

a)

i) Interest income on the 16 million one-year Australian dollar loan that pays 12 percent interest annually.

= 8,000,000 * 0.12 = 96,000A$; $ equivalent at the end of the year = 960,000*0.588 = $564480

ii) Amount of deposit accepted in GBP = 8000000*0.6250/1.6000 = 3,125,000GBP

Interest payment on the deposit = 3,125,000*0.1 = 312,500GBP

Equivalent $ value of the interest = 312,500*1.8480 = 577500

Therfore, net interest income = 564480 - 577500 =
**-$13020**

b) If net interest income is to be $200,000, the $ value of the interest expense should be 364480.

for this the exchange rate should be 364480/312500 = 1.166336

The rate should be 1.16634$/GBP

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