A US bank has made two term loans: one in $ (to a US borrower)...
90.2K
Verified Solution
Link Copied!
Question
Finance
A US bank has made two term loans: one in $ (to a US borrower) and the other in (to a UK borrower). The bank charges an 11% interest rate on these loans. Both loans have face values of $600 and one-year maturity. To fund the two loans, the bank issued one-year US dollar CD with an interest rate of 8%. To hedge FX risks owning to a weaker against $ when the UK loan matures, the bank negotiated with a FX dealer to enter into a forward contract, which allows to sell at a forward rate of $1.98 per one year from now.
Assuming the spot rate to be $2 per ,
1) what will be the profit on this UK loan? (10 points)
2) What will be the insurance cost of using this forward contract to hedge the FX risk stemming from the UK loan? (5 points)
Answer & Explanation
Solved by verified expert
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
