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 (AUD/USD) is $0.757/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%. The current spot rate of U.S. dollars for British pounds (GBP/USD) is $1.320/£1. 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?

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 (AUD/USD) is $0.757/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%. The current spot rate of U.S. dollars for British pounds (GBP/USD) is $1.320/£1. 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?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 1ST

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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 (AUD/USD) is $0.757/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 (GBP/USD) is $1.320/£1. 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 $0.715/A$1 and $1.520/£1, respectively?
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