Question

20

A bank purchases a six-month $4 million Eurodollar deposit at an interest rate of 8.5 percent per year. It invests the funds in a six-month Swedish krona bond paying 9.5 percent per year. The current spot rate of U.S. dollars for Swedish krona is $0.1800/SKr.

The six-month forward rate on the Swedish krona is being quoted at $0.1810/SKr. What is the net spread earned for six months on this investment if the bank covers its foreign exchange exposure using the forward market? (per 6 months)

Select one:

a. 1.082

b. 2.154

c. 0.754

d. 1.582

Answer 1

Deposit taken by bank			$4
Interest paid of 6 months @8.5% p.a			0.17
Total amount Paid after 6 months			$4.170
Convert $ into kr		0.1800$ / SKr
Therefore Now $4 =		22.2222SKr
Now invest swedish krona @9.5%
Interest received After 6 months			1.055556
Principal of bond			22.2222
Total Amount of SKr received after 6m			23.27776
Now convert SKr into dollar after 6 months @0.1810$ / Skr
Now dollar received after 6 months			$4.2132
Net Profit After Paying loan in 6 months		$0.0432
Present Value of $4.2132 @ 4.25%		$4.04
Value of loan after 6 months		$4.17
Now If get 23.27776 in 4.17$ then exchange rate is				0.179141
Now net spread diffrence per Skr in $ is			0.181-0.17914		0.00186

All The answer given in it are incorrect