Question

JP Morgan raises funds by issuing a $100,000 one-year CD (a liability) at 3%. It uses the funds to make a one-year loan at 5% in Australian dollars (A$). At the current exchange rate $0.80/A$, the amount of the AS$ loan is __________, and JP Morgan's profits from these transactions will be adversely affected if ___________.

A$100,000; the Australian dollar appreciates against the US$.

A$125,000; the Australian dollar appreciates against the US$.

A$125,000; the Australian dollar depreciates against the US$.

None of the above.

Answer 1

The overall amount of loan in Australian dollars= (1,00,000/.8)= 125000 AUD

When the Australian Dollar will be appreciating, it will mean that JP Morgan will be having more benefit because it will be collecting more and it will also mean that if the American dollar will be depreciating it will have to pay less.

JP Morgan will be adversely impacted by depreciation of Australian dollar and appreciation of American dollar.

Hence the correct answer will be option (C)A$125000, Australian dollar depreciates against the United States of American Dollars