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Sun Bank USA has purchased a 16 million one-year Australian dollar loan that pays 12 percent...

Question:

Sun Bank USA has purchased a 16 million one-year Australian dollar loan that pays 12 percent interest annually. The spot rate of U.S. dollars for Australian dollars is $0.6250/A$1. It has funded this loan by accepting a British pound (BP)-denominated deposit for the equivalent amount and maturity at an annual rate of 10 percent. The current spot rate of U.S. dollars for British pounds is $1.6000/BP1.

A. What is the net interest income earned in dollars on this one-year transaction if the spot rate of U.S. dollars for Australian dollars and U.S. dollars for BPs at the end of the year are $0.5880/A$1 and $1.8480/BP1, respectively? (Negative amount should be indicated by a minus sign.)

B. What should the spot rate of U.S. dollars for BPs be at the end of the year in order for the bank to earn a net interest income of $200,000 (disregarding any change in principal values)? (Round your answer to 4 decimal places. (e.g., 32.1616)) Spot Rate of US Dollar $ _

Spot Rate:

Spor rate of a currency is the rate at which one currency will be exchanged with another currency at the earliest possible value date. After the transaction has been completed the settlement date for the transaction will be after two business days.

Answer and Explanation:

a)

Initially , compute the loan amount using the equation as shown below:

Amount in A dollar = Amount in U.S dollar * Spot rate

Amount in A dollar...

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Learn more about this topic:

Foreign Currency Exchange: Supply and Demand for Currency

from Economics 102: Macroeconomics

Chapter 14 / Lesson 1
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