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?
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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F1d8ec3de-36e0-4f77-9d0b-0fdeaf81afeb%2F3dcc1aa5-7605-47b0-9a08-522b918cc4e1%2Frwckfal_processed.jpeg&w=3840&q=75)
Transcribed Image Text: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.
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