Homework Answers
(a) Initial Conditions:
Asset Raised: AUD Loan worth AUD 40 million, USD / AUD Rate: $ 0.625 / AUD , Interest Rate = 11% per annum
Liability Incurred: BP Deposit of Equivalent Amount, GBP/USD Rate: $ 1.6 / £, Interest Rate = 9% per annum
£ Equivalent Deposit Amount = (40 x 0.625) / 1.6 = £ 15.625 million
Interest Income (from AUD Loan) = 40 x 0.11 = AUD 4.4 million
Interest Expense (from £ Deposit) = 15.625 x 0.09 = £ 1.40625 million
After-1 Year: USD / AUD Rate = $ 0.588 / AUD and USD / GBP Rate = $ 1.85 / £
Net Interest Income in $ = Interest Income in $ - Interest Expense in $ = 4.4 x 0.588 - 1.40625 x 1.85 = - $ 0.0143625 or - $ 14362.5
(b) Interest Income = AUD 4.4 million and Interest Expense = £ 1.40625 million
AUD / USD Interest Rate = $ 0.588 / AUD and let the required USD/GBP spot rate be $ S / £. Target Net Interest Income = $ 300000
Therefore, 300000 = 4.4 x 0.588 - 1.40625 x S
300000 = 2587200 - 1406250 x S
S = (2587200 - 300000) / 1406250 = $ 1.626 / £
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