Question

Following previous question, suppose that instead of funding the $200 million investment in 10 percent German loans with U.S. CDs, the FI manager funds the German loans with $200 million equivalent one-year euro CDs at a rate of 7 percent Now the balance sheet of the FI would be as follows Assets U.S. loans (one year, 600) ( in USD) German loans (one year, 10%) (made in euro, equivalent value in USD) Total Liabilities (in USD) (funds raised in euro, equivalent value in USD) S 300 S 200 S 500 $ 300 U.S. CDs (one year, 4%) 200 German CDs (one year, 7%) $ 500 Total (1) Calculate the following three if the spot foreign exchange rate falls to $1.15/1 over the year the return on the FI's investment portfolio the average cost of funds the net return for the FI (1) Calculate the following three if the spot foreign exchange rate falls to S1.35/1 over the year the return on the FI's investment portfolio the average cost of funds the net return for the FI

Answer 1

Exchange Exchange Rate 4 US Loan 5Rate 6 $ proceeds of US Loan at end of year 1.00 $ 1.15$ 1.35 S300.00 $300.00 $318.00$318.00 6% 6% 8 German Loan 9 Rate 10 $ proceeds of German Loan at end of year $200.00$234.78 10% $220.00$258.26 10% $ 38.00 $ 76.26 12 Return Amount on FI'sInvestment Portfolio 13 15 US CD's 16 Rate 17 $ proceeds of US CD' at end of year 18 19 German CD's 20 Rate 21 $ proceeds of German CD's at end of year S300.00 $300.00 4% S312.00$312.00 4% $200.00$234.78 7.00% 7.00% 214.00$251.22 $ 26.00$63.22 5.20% 12.64% 23 Total Cost of Funds 24 Average Cost of Funds 25 26 Net Return for FI 27 28 $ 12.00 $ 13.04 2.40% 2.61%

Exchange Rate 1.15 Exchange Rate 1.35 4 US Loan 5Rate 6 $ proceeds of US Loan at end of year 300 0.06 B4* (1+B5) -B4 B5 B6 8 German Loan 9 Rate 10 $ proceeds of German Loan at end of year 200 0.1 B8* (1+B9) B8*C2/B2 B9 C8*(1+C9) 12 Return Amount on FI'sInvestment Portfolio 13 -B6-B10-84-BB-(C6-C4)+(C10-BB) 15 US CD's 16 Rate 17 $ proceeds of US CD' at end of year 18 19 German CD's 20 Rate 21 $ proceeds of German CD's at end of year 300 0.04 B15* (1+B16) -B15 B16 B17 200 0.07 B19* (1+B20) B19* C2/B2 B20 C19* (1+C20) 23 Total Cost of Funds 24 Average Cost of Funds 25 26 Net Return for FI 27 F(B17-B15)+(B21-B1 (C17-C15)+(C21-B1 B23/(B15+B19) C23/(C15+B19) -B12-B23 -C12-C23 B26/(B4+B8) C26/(B4+B8)