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