A U.S. bank converted $50 million to euros to make a euro loan to a valued corporate customer when the exchange rate was €.625/$. The borrower agreed to repay the principal plus 4% interest in 1 year. The borrower repaid euros on the maturity date when the exchange rate was $1.75 per euro. What was the bank's percentage return (in terms of dollars)? Round intermediate steps to four decimals. -.0491 .0938 .1156 .1375

A U.S. bank converted $50 million to euros to make a euro loan to a valued corporate customer when the exchange rate was €.625/$. The borrower agreed to repay the principal plus 4% interest in 1 year. The borrower repaid euros on the maturity date when the exchange rate was $1.75 per euro. What was the bank's percentage return (in terms of dollars)? Round intermediate steps to four decimals. -.0491 .0938 .1156 .1375

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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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

A U.S. bank converted $50 million to euros to make a euro loan to a valued corporate customer when the exchange rate was €.625/$. The borrower
agreed to repay the principal plus 4% interest in 1 year. The borrower repaid euros on the maturity date when the exchange rate was $1.75 per euro.
What was the bank's percentage return (in terms of dollars)? Round intermediate steps to four decimals.
-.0491
.0938
.1156
.1375

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Step 1: Convert $50 million to Euros at the initial exchange rate

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Step 2: Calculate the total repayment in Euros with interest.

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Step 3: Calculate the bank's dollar return and percentage return

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