Zongo Industrial Banks, a U.S. bank, has 1-year U.S. $300 million loan that earns anaverage rate of return of 6%. Forrest Gump Bank also has one year single payment Euroloans of €110 million earning 8%. Forrest Gump Bank's funding source is $400 millionin US$ one year NCDS, on which they are paying 4%. Initially the exchange rate is €1.10per $1 U.S. The one year forward rate is €1.14 per $1 U.S. What is the bank's dollar %spread if they hedge fully using Euro forwards?Note: For this questions, you MUST show detailed calculation as we did in the class.That is, show the formula and substitution.

Answered: Image /qna-images/answer/3dcc1aa5-7605-47b0-9a08-522b918cc4e1.jpg

Answered: per $1 U.S. The one year forward rate…

per $1 U.S. The one year forward rate is €1.14 per $1 U.S. What is the bank's dollar % spread if they hedge fully using Furo forwards?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Related questions

Q: An investor has $10m to invest and has the following options: 1) depositing it in a US bank account…

A: Exchange rate: It is the value of a currency that is exchanged with another currency.

Q: Suppose the interest rate on investments in GBP is 12% in London and the interest rate for…

A: Covered interest rate parity is used to define the relationship between the forward and spot…

Q: Suppose that the treasurer of IBM has an extra cash reserve of $100,000,000 to invest for six…

A: Cash reserve = $100,000,000Time for investment = 6 monthsInterest in US = 12% p.aInterest in Germany…

Q: Suppose that the treasurer of IBM has an extra cash reserve of $100, 000, 000 to invest for six…

A: Cash Reserve = $100,000,000United States interest rate = 9% (six-month)Germany interest rate = 8%…

Q: Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.77 and Kr 5.92,…

A: Forward Rate (Kr/$) = Spot Rate (Kr/$) x [1 + rate(Kr) x N/360]/ [1 + rate($) x N/360] => Forward…

Q: Brazilian real appreciates. Wharton Econometrics Forecasting Associates expects the Brazilian real…

A: “Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: If the international fisher effect holds, and if the following information is given, what should be…

A: The International Fisher Effect (IFE) is an economic theory stating that the expected disparity…

Q: Foreign Exchange Risk and the Cost of Borrowing Swiss Francs. The chapter demonstrated that a firm…

A: Variables in the question:Value of debt principal=SF1.3 millionTime=1 yearInitial spot rate:…

Q: The current spot rates are: GBP (S/E) EUR (S/E) JPY (¥/$) Bid 1.115 1.025 102 13,000,000.35 You owe…

A: The objective of the question is to calculate the final amount in the bank after two foreign…

Q: The Canadian Dollar (CAD) has shown higher volatility in recent days. The spot rate is $0.5/CAD1.…

A: Forward Rate:The forward rate refers to the exchange rate at a future point in time, agreed upon…

Q: rates on the same 10) Your company can get yen loans for 2.0%. 4.5%. The spot yen per dollar…

A: Present value (PV) is the current value of a future sum of money or stream of cash flow given a…

Q: Lakonishok Equipment has an investment opportunity in Europe. The project costs €9.5 million and is…

A: Net present value is the difference between the present value of cash inflows and present value of…

Q: The current exchange rate is 0.90 euros per dollar, but you believe the dollar will decline to 0.80…

A: The question is related to Return on Investment. The details are given as under Current Exchange…

Q: Assume the forward rate of the British Pound is $.50 and the spot rate of the British Pound is $.48.…

A: Given:Forward rate of GBP (S.50)Spot rate of GBP ($.48)Amount to be received in USD in 360 days:…

Q: it assesses its exposure to exchange rate risk. Estimate the volatility of each currency's…

A: Volatilty is measured by the standard deviation and that show much is going to change or deviation…

Q: Suppose the risk free rate in pounds (£) is 5.71% and the risk free rate in US dollars ($) is 7.95%.…

A: The covered interest rate parity ensures the determination of future exchange rates without…

Q: Foreign Exchange Risk and the Cost of Borrowing Swiss Francs. The chapter demonstrated that a firm…

A: The spot rate is the rate at which a bond or other financial instrument trades on an immediate…

Q: What is the amount of the risk premium on a U.S. Treasury bill if the inflation rate is 2.6 percent,…

A: Market rate = 7.4% Inflation rate = 2.6% Risk free rate = 3.1%

Q: A bank’s position in OTC options on the dollar-euro exchange rate with a current Delta of -400 and a…

A: Changes in volatility refer to fluctuations in the degree of price variability or risk associated…

Q: What are the expected U.S. dollars UCD ends up receiving for its 250,000 euro receivable based on…

Q: Foreign Exchange Risk and the Cost of Borrowing Swiss Francs. The chapter demonstrated that a firm…

A: Debt Principal in Swiss Franc (SF) = 1.5 millionInitial Spot Rate = SF1.4700/5 = SF 0.2940/$Cost of…

Q: An American rm owes SFr 6, 000, 000.00 payable in one year. The current spot it$1.3750/SFr. A Swiss…

A: The objective of the question is to calculate the amount the American firm needs to borrow today to…

Q: Due to the integrated nature of their capital markets, investors in both the U.S. and Switzerland.…

A: In different markets, the words "future rate" and "spot rate" have slightly different definitions.…

Q: Your US-based firm is evaluating a project in France with cash flows in Euros. Which of the…

A: The risk free rate at which the investors these are use as a benchmarking order to determine the…

Q: Suppose one Euro can purchase 1.25 U.S. dollars today in the foreign exchange market, and currency…

A: Given:Current Value: 1.25 U.S. dollars per EuroDepreciation Rate: 20%Future Value in Dollars =…

Q: Foreign Exchange Risk and the Cost of Borrowing Swiss Francs. The chapter demonstrated that a firm…

A: The objective of the question is to calculate the effective after-tax cost of debt for a U.S.…

Q: 2. The interest rate in European bank is 5% now, and the exchange rate is currently 1.05 dollars per…

A: Under uncovered interest rate parity theory, the interest rate differential between 2 countries will…

Q: ABC Company wants to possibly expand its plant in Europe. The current spot exchange rate is for Euro…

A: Initial Investment = €2.1 million Yearly cash flows = €950000 Discount Rate = 10% Rate of Interest…

Q: Cray Research sold a supercomputer to the Max Planck Institute in Germany on credit and invoiced…

A: Since you have posted a question with multiple sub parts, we will provide the solution only to the…

Question

Zongo Industrial Banks, a U.S. bank, has 1-year U.S. $300 million loan that earns an
average rate of return of 6%. Forrest Gump Bank also has one year single payment Euro
loans of €110 million earning 8%. Forrest Gump Bank's funding source is $400 million
in US$ one year NCDS, on which they are paying 4%. Initially the exchange rate is €1.10
per $1 U.S. The one year forward rate is €1.14 per $1 U.S. What is the bank's dollar %
spread if they hedge fully using Euro forwards?
Note: For this questions, you MUST show detailed calculation as we did in the class.
That is, show the formula and substitution.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Accounting for Foreign Exchange Transactions

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions

Fred Bankman is a hedge fund manager. He has obtained the following exchange rate and interest rate quotations: Bid Ask Spot rate(dollars per euro) 1.0867 1.0871 One-year forward rate(dollars per euro) 1.1078 1.1083 Deposit Loan One -year euro interest rate 3.212% 3.356% One-year dollar interest rate 5.215% 5.316% Is there any arbitrage opportunity? if so, explain how Mr Bankman might make use of the opportunity and express his arbitrage profit in dollars. If not, explain why not.
company will receive €75 million in 1 year from an Italian customer. observe the following data. $:€ Spot Rate $1.25:€1.00 $:€ Forward Rate $1.30:€1.00 How many USD will you receive if you employ a forward hedge
The US 1 year spot rate is 3.61% and the Mexican 1 year spot rate is 7.44%. A US investor purchases a Mexican corporate bond with an expected 1 year return of 9.76%, as measured in Mexican peso. The current USD/MXP exchange rate is 0.18. If the investor decides to hedge the currency risk exposure in the forward market, what would be the expected return on this portfolio, if interest rate parity holds?
Assume the following information: 90-day U.S. interest rate 90-day Malaysian interest rate 3% 5% 90-day forward rate of Malaysian ringgit Spot rate of Malaysian ringgit $0.394 $0.398 Assume that the Santa Barbara Co. in the United States will need 250,000 ringgit in 90 days. It wishes to hedge this payables position. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated costs for each type of hedge. Do not round intermediate calculations. Round your answers to the nearest dollar. The firm will pay out $ in 90 days if it uses the forward hedge and $ if it uses the money market hedge. Thus, it should use the -Select- hedge.
An American firm wants to borrow 100 million USD for 1 year to fund a capital investment project. The firm can borrow the money from a U.S. bank at an interest rate of 6%. Alternatively, the firm could borrow British pounds at a rate of 3% a year. At the end of the year, the firm would pay back the loan and interest. The initial exchange rate is 1 GBP = 2 USD. If at the end of the year the exchange rate changes from 1 GBP = 2 USD to 1 GBP = 3 USD, what was the actual cost of borrowing (effective interest rate) if the American firm chose to obtain the loan in British pounds?
Assume that interest rate parity holds and that 90-day risk-free securities yield 3% in the United States and 3.3% in Germany. In the spot market, 1 euro equals $1.50. What is the 90-day forward rate?