An FI has a 1-year 8-percent US$160 million loan financed with a 1-year 7-percent UK£100 million CD. The current exchange rate is $1.60/£. If the exchange rate remains the same, what is the dollar spread earned by the bank at the end of the year?

Question

Quizplus · Accepted Answer

First, we need to convert the UK£100 million CD into dollars using the current exchange rate:
UK£100 million = $100 million × $1.60/£ = $160 million

Now we can compare the interest earned on the loan (8% of $160 million = $12.8 million) to the interest paid on the CD (7% of $160 million = $11.2 million). The difference between these two amounts is the dollar spread earned by the bank:
$12.8 million - $11.2 million = $1.6 million or $1,600,000.

An FI Has a 1-Year 8-Percent US$160 Million Loan Financed