22-114 If at the end of the year,the exchange rate is $1.65/£,what is the spread earned on the loan by the FI in dollars after adjusting fully for exchange rates?
A)-$3,750,000.
B)-$1,250,000.
C)+$1,250,000.
D)+$3,750,000.
E)+$5,000,000.

Question

Quizplus · Accepted Answer

To calculate the spread earned on the loan, we need to subtract the cost of funding in pounds from the interest received in pounds, convert it to dollars at the spot rate ($1.50/£), then adjust for the year-end exchange rate ($1.65/£).

The interest received in pounds is £100,000,000 x 10% = £10,000,000. The cost of funding in pounds is £90,000,000 x 8% = £7,200,000. The spread earned in pounds is £10,000,000 - £7,200,000 = £2,800,000.

Converting the spread to dollars at the spot rate, we get:

£2,800,000 / $1.50/£ = $4,200,000

Adjusting for the year-end exchange rate, we get:

$4,200,000 x $1.65/£ = $6,930,000

So the spread earned on the loan by the FI in dollars after adjusting fully for exchange rates is $6,930,000 - $3,180,000 = $3,750,000. Therefore, the correct answer is A) -$3,750,000.

22-114 If at the End of the Year,the Exchange Rate