Homework Answers
Out of 450,
350 million is invested in US loans (which is around77.78% of total)
100 million is invested in German loans (which is around 22.22% of total)
a.
- Sells $100 million for pounds, which would be 100/1.45 (= € 68.9655 million)
- Lend the sum @12% for one year, it will be € 68.9655 million * 1.12 = €77.24137 million
- Dollar proceed from German Loan = €77.24137 million*1.45 = $ 112 million (exchange rate remains same)
- Return on German Loan= (112-100)*100/100 = 12%
- Return On US loan = 7%
- Weightage return on FI's investment portfolio = .7778 * 7 + .2222* 12 = 8.11%
- Net return for the FI=8.11 - 5 = 3.11% Answer
b.
- Sells $100 million for pounds, which would be 100/1.45 (= € 68.9655 million)
- Lend the sum @12% for one year, it will be € 68.9655 million * 1.12 = €77.24137 million
- Dollar proceed from German Loan = €77.24137 million*1.30 = $ 100.41379 million (exchange rate changed $1.30/1€ )
- Return on German Loan= (100.41379-100)*100/100 = 0.41379%
- Return On US loan = 7%
- Weightage return on FI's investment portfolio = .7778 * 7 + .2222* 0.41379= 5.53639%
- Net return for the FI=5.53639 - 5 = 0.53639% Answer
c.
- Sells $100 million for pounds, which would be 100/1.45 (= € 68.9655 million)
- Lend the sum @12% for one year, it will be € 68.9655 million * 1.12 = €77.24137 million
- Dollar proceed from German Loan = €77.24137 million*1.60 = $ 123.5862 million (exchange rate changed $1.60/1€ )
- Return on German Loan= (123.5862-100)*100/100 = 23.5862%
- Return On US loan = 7%
- Weightage return on FI's investment portfolio = .7778 * 7 + .2222* 23.5862= 10.6858%
- Net return for the FI=10.6858 - 5 = 5.6858% Answer
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