Chapter 20, Problem 19QA

Required:a. Calculate the dollar proceeds from the FI’s loan portfolio at the end of the year, the return on the FI’s loan portfolio, and the net return for the FI if the pound spot foreign exchange rate falls to $1.20/£1 and the lira spot foreign exchange rate falls to $0.156/TL1 over the year.b. Calculate the dollar proceeds from the FI’s loan portfolio at the end of the year, the return on the FI’s loan portfolio, and the net return for the FI if the pound spot foreign exchange rate rises to $1.40/£1 and the lira spot foreign exchange rate rises to $0.17/TL1 over the year.c. Suppose that the FI funds the $250 million U.S. loans with $250 million one-year U.S. CD at a rate of 4 percent; funds $150 equivalent British loans with $150 million equivalent one-year pound CDs at a rate of 5 percent; funds $100 million equivalent Turkish loans with $100 million equivalent one-year Turkish lira CDs at a rate of 6 percent. Assume no other changes. What will the FI’s balance sheet look like…

A Ghanaian firm has two options in sourcing funds. The first option is to raise cedi on the local financial market at 25% per annum. The second option is to borrow dollars from a US bank at 6% per annum, convert it into cedi and repay the loan in one year. Assuming that the dollar appreciates by 15% against the cedi by the end of the year when the loan is due, calculate which of the options is cheaper.

Your US-based firm is evaluating a project in France with cash flows in Euros. Which of the following rates should you use as a risk-free rate? US Treasury- 3 month 0.50% US Treasury- 10 year 2.90% US Treasury Inflation-Indexed- 10 year -0.12% France Government Debt- 10 year 1.37% Germany Government Debt- 10 year 0.85% AAA-rated Euro Area Central Government Bond- 10 year 0.92%