A bank purchases a six-month $3 million Eurodollar deposit at an interest rate of 7.3 percent per year. It invests the funds in a six-month Swedish krona bond paying 7.5 percent per year. The current spot rate of U.S. dollars for Swedish krona is $0.1800/SKr. a. The six-month forward rate on the Swedish krona is being quoted at $0.1810/SKr. What is the net spread earned for six months on this investment if the bank covers its foreign exchange exposure using the forward market? b. At what forward rate will the spread be only 1 percent per year? (For all requirements, do not round intermediate calculations. Round your answers to 4 decimal places. (e.g., 32.1616)) a. Net spread b. Forward rate 4.3290 % per SKr

EBK CONTEMPORARY FINANCIAL MANAGEMENT
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Author:MOYER
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Chapter22: International Financial Management
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Problem 8P
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Nikul 

A bank purchases a six-month $3 million Eurodollar deposit at an interest rate of 7.3 percent
per year. It invests the funds in a six-month Swedish krona bond paying 7.5 percent per year.
The current spot rate of U.S. dollars for Swedish krona is $0.1800/SKr.
a. The six-month forward rate on the Swedish krona is being quoted at $0.1810/SKr. What is
the net spread earned for six months on this investment if the bank covers its foreign
exchange exposure using the forward market?
b. At what forward rate will the spread be only 1 percent per year?
(For all requirements, do not round intermediate calculations. Round your answers to 4
decimal places. (e.g., 32.1616))
a.
Net spread
b.
Forward rate
4.3290 %
per SKr
Transcribed Image Text:A bank purchases a six-month $3 million Eurodollar deposit at an interest rate of 7.3 percent per year. It invests the funds in a six-month Swedish krona bond paying 7.5 percent per year. The current spot rate of U.S. dollars for Swedish krona is $0.1800/SKr. a. The six-month forward rate on the Swedish krona is being quoted at $0.1810/SKr. What is the net spread earned for six months on this investment if the bank covers its foreign exchange exposure using the forward market? b. At what forward rate will the spread be only 1 percent per year? (For all requirements, do not round intermediate calculations. Round your answers to 4 decimal places. (e.g., 32.1616)) a. Net spread b. Forward rate 4.3290 % per SKr
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