Question

A U.S. bank converted $1 million to Swiss francs to make a Swiss franc loan to a valued corporate customer when the exchange rate was 1.2 francs per dollar. The borrower agreed to repay the principal plus 5 percent interest in one year. The borrower repaid Swiss francs at loan maturity and when the loan was repaid the exchange rate was 1.3 francs per dollar. What was the bank's dollar rate of return? Show your calculations.

Answer 1

Amount In swiss franc	=	Amount in USD/Exchange rate on loan date
	=	1,000,000*1.2
	=	1,200,000 swiss franc
Amount repaid after one year(in swiss franc)	=	1,200,000*(1+interest rate)
	=	1,200,000*(1+0.05)
	=	1,200,000*(1.05)
	=	1260000
Amount in USD	=	Amount in swiss franc/exchange rate on repaymnet date
	=	1,260,000/1.3
	=	969230.7692
Return in USD	=	(Loan repaid-loan given)/loan given
	=	(969,230.8-1,000,000)/1,000,000
	=	-30769.2/1,000,000
	=	-0.0307692
		or -3.07692%