A U.S. bank has £50 million in deposits and makes a loan of £100 million when the exchange rate is $1 = £1. 5. If the exchange rate changes to $1 = £2, then the bank's net worth will change by

Question

Quizplus · Accepted Answer

The bank's assets (loan) and liabilities (deposits) are affected by the exchange rate change. Initially, the loan is worth $150 million (100 million * 1.5) and deposits are worth $75 million (50 million * 1.5). After the exchange rate change, the loan is worth $200 million (100 million * 2) and deposits are worth $100 million (50 million * 2). The net worth change is the difference in net worth before and after the exchange rate change: ($200 million - $100 million) - ($150 million - $75 million) = $100 million - $75 million = -$8.33 million.

A US Bank Has £50 Million in Deposits and Makes a a Loan