A U.S. FI is raising all of its $20 million liabilities in dollars (one-year CDs) but investing 50 percent in U.S. dollar assets (one-year maturity loans) and 50 percent in U.K. pound sterling assets (one-year maturity loans). Suppose the promised one-year U.S. CD rate is 9 percent, to be paid in dollars at the end of the year, and that one-year, credit risk-free loans in the United States are yielding only 10 percent. Credit risk-free one-year loans are yielding 16 percent in the United Kingdom.
-What amount, in sterling, will the FI have to repatriate back to the U.S. after one year if the exchange rate remains constant at $1.60 to ≤1.
A)≤6.25 million.
B)≤7.875 million.
C)≤7.25 million.
D)≤6.625 million.
E)≤11.26 million.

Question

A U.S. FI is raising all of its $20 million liabilities in dollars (one-year CDs) but investing 50 percent in U.S. dollar assets (one-year maturity loans) and 50 percent in U.K. pound sterling assets (one-year maturity loans). Suppose the promised one-year U.S. CD rate is 9 percent, to be paid in dollars at the end of the year, and that one-year, credit risk-free loans in the United States are yielding only 10 percent. Credit risk-free one-year loans are yielding 16 percent in the United Kingdom. 
-What amount, in sterling, will the FI have to repatriate back to the U.S. after one year if the exchange rate remains constant at $1.60 to ≤1.
A)≤6.25 million. 
B)≤7.875 million. 
C)≤7.25 million. 
D)≤6.625 million. 
E)≤11.26 million.

Quizplus · Accepted Answer

The Answer of A U.S. FI is raising all of its $20 million liabilities in dollars (one-year CDs) but investing 50 percent in U.S. dollar assets (one-year maturity loans) and 50 percent in U.K. pound sterling assets (one-year maturity loans). Suppose the promised one-year U.S. CD rate is 9 percent, to be paid in dollars at the end of the year, and that one-year, credit risk-free loans in the United States are yielding only 10 percent. Credit risk-free one-year loans are yielding 16 percent in the United Kingdom. 
-What amount, in sterling, will the FI have to repatriate back to the U.S. after one year if the exchange rate remains constant at $1.60 to ≤1.
A)≤6.25 million. 
B)≤7.875 million. 
C)≤7.25 million. 
D)≤6.625 million. 
E)≤11.26 million.

A US FI Is Raising All of Its $20 Million Liabilities