Homework Answers
Solution :
Sun Bank wants to purchase AUD 8 million loan that pays 13% annually. The current spot rate for USD and AUD is $0.625 / A$1.
Total USD that is equivalent to AUD 8 million = A$ 8 million * $ 0.625 / A$ = $ 5 million
The bank wants to fund this loan by pound denominated deposit . The current spot rate of GBP and USD is $1.60 / £.
Total GBP that is equivalent to $5 million = $5 million / 1.60 = £ 3,125,000
Interest rate on this deposit is 11%
Interest income for loan in AUD = AUD 8 million * ( 1+13%) = AUD 9,040,000
One year spot rate for USD and AUD is $0.588/ AUD
Hence equivalent USD = AUD 9,040,000 * $0.588 / AUD = $ 5,315,520
Interest expense for deposit in GBP = £ 3,125,000 * ( 1+11%) = £ 3,468,750
One year spot rate for GBP and USD is $1.45/£
Hence equivalent USD = £ 3,468,750 * $1.45 / £ = $ 5,029,688.5
Net interest income = interest earned - interest expense = $5,315,520 - $ 5,029,687.5 = $285,832
Solution to part A ) $285,832
Solution to part B )
We want to have NII of $190,000 and for that we need to find the spot rate of USD and BP
We can use the formula to calculate the spot rate
$190,000 = Interest earned - interest expense
$190,000 = $5,315,520 - £3,468,750 * Spot rate
£ 3,468,750 * spot rate = $5,315,520 -$190,000 = $5,125,520
Spot rate = $5,125,520 / £ 3,468,750 = $1.47763/£
Spot rate = $1.47763/£
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