An international bank in Paris has loans maturing in a year of 500 million Euros with a 10% annual interest rate financed by U.S. certificates of deposit maturing in a year of $400 million with a 5% rate.
What is the expected interest rate spread in Euros for the bank if $1 U.S. is worth 0.70 Euros, and what is the expected interest rate spread in Euros if the dollar rises to be worth 1 Euro?

Question

Quizplus · Accepted Answer

Expected Interest Rate spread in Euros = Interest Revenues - Interest Expenses = 
(500 mil. Euros x .10) - (400 mil. U.S. dollars x .70 Euro x .05) 
= 50 million Euros - 14 million Euros = 36 million Euros 
Expected Interest Rate Spread if the U.S. dollar rises to be worth 1 Euro 
= (500 mil. Euros x .10) - (400 mil. U.S. dollars x 1 Euro x .05) =
 50 million Euros - 20 million Euros = 30 million Euros 
(I.e. a decline in the Net Interest Spread by 6 million Euros)

An International Bank in Paris Has Loans Maturing in a Year