Question

OZ Bank is issuing another AUD 50m bonds but this time the buyer happens to be Leo Lederhosen who has got his account at Deutsche Bank in Germany Leo has to pay OZ Bank [al (AUD EUR) 50m. OZ Bank is willing to buy EUR(sell AUD) from Leo at the rate 1 AUD against 0.60 EUR. To finance his bond purchase Leo will therefore transfer [bjm EUR to OZ Bank. By coincident OZ Bank and Deutsche Bank have accounts with each other. Shortly after the transfer ECB is raising the interest rate and the EUR is [c] (appreciating depreciating) to AUD/EUR 0.50 Use the attached file to add each of the aforementioned transactions/changes to the balance sheets of OZ Bank and Deutsche Bank. OZ Bank Assets Liabilities and e ESF AUD 150m Deposits AUD 900m Loans AUD 850m Issued Bonds Dep. at Deutsche Bank Equity AUD 100m Assets Reserves Deutsche Bank Liabilities and equity EUR 700m EUR 100m Deposits Loans EUR 900m Deposits Leo EUR 100m Deposit OZ Bank Equity EUR 200m

Answer 1

a) Leo has to pay OZ Bank AUD 50 M.

b)Leo will therefore transfer EUR 30 M [ 50*.6= 30]

c) As the ECB or European Central bank Increases interest rates, the Euro appreciates vis a vis AUD. earlier one could get 1 AUD by Shelling 0.6 EURO but now it costs only 0.5 Euro.