A British bank issues a $130 million, three-year Eurodollar CD at a fixed annual rate of 8 percent. The proceeds of the CD are lent to a British company for three years at a fixed rate of 10 percent. The spot exchange rate of pounds for U.S. dollars is £1.50/US$. a-1. Is this expected to be a profitable transaction ex ante? Yes No a-2. What are the cash flows if exchange rates are unchanged over the next three years? (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places. (e.g., 32.16)) Eurodollar CD British Loan t Cash Outflow (U.S.$) (£) Cash Inflow (£) Spread (£) 1 million million million million 2 million million million million 3 million million million million b. If the U.S. dollar is expected to appreciate against the pound to £1.65/$1, £1.815/$1, and £2.00/$1 over the next three years, respectively, what will be the cash flows on this transaction? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places. (e.g., 32.16)) Eurodollar CD British Loan t Cash Outflow (U.S.$) (£) Cash Inflow (£) Spread (£) 1 million million million million 2 million million million million 3 million million million million c. If the British bank swaps U.S. dollar payments for British pound payments at the current spot exchange rate, what are the cash flows on the swap and on the entire hedged position? Assume that the U.S. dollar appreciates at the same rates as in part (b). (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places.(e.g., 32.16)) t Cash Flow (£) Swap Payments (£) Net Swap Cash Flow (£) Total Cash Flow (£) 1 million million million million 23 million million million million million million million million
A British bank issues a $130 million, three-year Eurodollar CD at a fixed annual rate of 8 percent. The proceeds of the CD are lent to a British company for three years at a fixed rate of 10 percent. The spot exchange rate of pounds for U.S. dollars is £1.50/US$. a-1. Is this expected to be a profitable transaction ex ante? Yes No a-2. What are the cash flows if exchange rates are unchanged over the next three years? (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places. (e.g., 32.16)) Eurodollar CD British Loan t Cash Outflow (U.S.$) (£) Cash Inflow (£) Spread (£) 1 million million million million 2 million million million million 3 million million million million b. If the U.S. dollar is expected to appreciate against the pound to £1.65/$1, £1.815/$1, and £2.00/$1 over the next three years, respectively, what will be the cash flows on this transaction? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places. (e.g., 32.16)) Eurodollar CD British Loan t Cash Outflow (U.S.$) (£) Cash Inflow (£) Spread (£) 1 million million million million 2 million million million million 3 million million million million c. If the British bank swaps U.S. dollar payments for British pound payments at the current spot exchange rate, what are the cash flows on the swap and on the entire hedged position? Assume that the U.S. dollar appreciates at the same rates as in part (b). (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places.(e.g., 32.16)) t Cash Flow (£) Swap Payments (£) Net Swap Cash Flow (£) Total Cash Flow (£) 1 million million million million 23 million million million million million million million million
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A British bank issues a $130 million, three-year Eurodollar CD at a fixed annual rate of 8 percent. The
proceeds of the CD are lent to a British company for three years at a fixed rate of 10 percent. The spot
exchange rate of pounds for U.S. dollars is £1.50/US$.
a-1. Is this expected to be a profitable transaction ex ante?
Yes
No
a-2. What are the cash flows if exchange rates are unchanged over the next three years? (Do not round
intermediate calculations. Enter your answers in millions rounded to 2 decimal places. (e.g.,
32.16))
Eurodollar CD
British Loan
t
Cash Outflow (U.S.$)
(£)
Cash Inflow (£)
Spread (£)
1
million
million
million
million
2
million
million
million
million
3
million
million
million
million
b. If the U.S. dollar is expected to appreciate against the pound to £1.65/$1, £1.815/$1, and £2.00/$1
over the next three years, respectively, what will be the cash flows on this transaction? (Negative
amount should be indicated by a minus sign. Do not round intermediate calculations. Enter
your answers in millions rounded to 2 decimal places. (e.g., 32.16))
Eurodollar CD
British Loan
t
Cash Outflow (U.S.$)
(£)
Cash Inflow (£)
Spread (£)
1
million
million
million
million
2
million
million
million
million
3
million
million
million
million
c. If the British bank swaps U.S. dollar payments for British pound payments at the current spot
exchange rate, what are the cash flows on the swap and on the entire hedged position? Assume that
the U.S. dollar appreciates at the same rates as in part (b). (Do not round intermediate
calculations. Enter your answers in millions rounded to 2 decimal places.(e.g., 32.16))
t
Cash Flow
(£)
Swap Payments
(£)
Net Swap
Cash Flow
(£)
Total Cash Flow (£)
1
million
million
million
million
23
million
million
million
million
million
million
million
million
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