Question

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QUESTION 15 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 against 0.60 EUR. To finance his bond purchase Leo will therefore transfer an account at Deutsche Bank (so-called correspondent bank). Shortly, after the transfer, the ECB is raising the interest rate and the EUR is (AUD/EUR) 50m. OZ Bank is willing to buy EUR (-sell AUD) from Leo at the rate 1 AUD m EUR to OZ Bank. By coincident OZ Bank has (appreciating/depreciating) to AUD/EUR 0.50. Use the attached file to add each of the aforementioned transactions/change s/profits/losses to the balance sheets of OZ Bank and Deutsche Bank. Question Test 4 Correspondent Bank.pdf

Answer 1

BOX 1

Answer is AUD 50M.

The bonds issued by OZ Bank are denominated in AUD. so, Leo, irrespective of the country he belongs to, has to pay AUD 50M by getting euros converted into AUD.

BOX 2

Answer is EUR30M.

Given exchange rate : 1AUD=0.60 EUR.

So, Leo has to transfer (0.60EUR/AUD) X AUD50M = EUR30M to OZ Bank to buy AUD50M worth of bonds.

BOX 3

Answer is Appreciating.

Given initial exchange rate : 1AUD=0.60EUR. Inverse quote is 1EUR = 1/0.60AUD ,i.e. 1EUR= AUD1.667

Exchange rate after the hike by ECB in interest rate : 1AUD=0.50EUR. Inverse quote is 1EUR =AUD1/0.50 i.e. 1EUR=AUD2.

Since, more AUD is now to be spent to buy EUR, hence, EUR is appreciating.

Hope it helps!