Millon National Bank has 10 million British pounds (£)in one-year assets and £8 million in one-year liabilities.In addition,it has one-year liabilities of 4 million euros (€).Assets are earning 8 percent and both liabilities are being paid at a rate of 8 percent.All interest and principal will be paid at the end of the year.If the year-end spot exchange rate for the British pound is $1.50/£ and the liabilities pay 8 percent,what is the maximum that the € can appreciate and the bank still maintain a zero profit?

Question

Quizplus · Accepted Answer

= If the spot exchange rate for the pound is $1.50/£ and liabilities pay 8.0 percent,
 FNII = (£10,000,000 x 0.08) - (£8,000,000 x 0.08) + (€4,000,000 x 0.08)
 FNII = (£800,000 - £640,000) - €320,000
 FNII = £160,000 - €320,000
 The break-even exchange rate with the euro can be found as follows
 $NII = 0 = (£160,000 x$1.50/£) - (€320,000 x €y.yy/$)
 $240,000 = €320,000 x €y.yy/$
 €y.yy = €320,000 x 240,000
 = €1.333/$.

Millon National Bank Has 10 Million British Pounds (£)In One-Year