The U.K. securities would yield a h

The U.K. securities would yield a higher return. Compared to the 12 percent return in the U.S., a U.S. investor could convert $1,000,000 to £666,667 and invest it at 9 percent. In one year the expected return of principal and interest is £726,667. If these pounds are sold forward at $1.6/£1, the investor will lock in $1,162,667 for a 16.27 percent return.

Integrated Mini Case: Foreign Exchange Risk Exposure

Suppose that a U.S. FI has the following assets and liabilities:

Assets Liabilities
$500 million $1,000 million
U.S. loans (one year) U.S. CDs (one year)
in dollars in dollars
$300 million equivalent
U.K. loans (one year)
(loans made in pounds)
$200 million equivalent
Turkish loans (one year)
(loans made in Turkish lira)

The promised one-year U.S. CD rate is 4 percent, to be paid in dollars at the end of the year; the one-year, default risk–free loans in the United States are yielding 6 percent; default risk–free one-year loans are yielding 8 percent in the United Kingdom; and default risk–free one-year loans are yielding 10 percent in Turkey. The exchange rate of dollars for pounds at the beginning of the year is $1.6/£1, and the exchange rate of dollars for Turkish lira at the beginning of the year is $0.5533/TRY1.

1. Calculate the dollar proceeds from the FI’s loan portfolio at the end of the year, the return on the FI’s loan portfolio, and the net interest margin for the FI if the spot foreign exchange rate has not changed over the year.

At the beginning of the year, the FI sells $300 million for pounds on the spot currency markets at an exchange rate of $1.60 to £ => $300 million/1.60 = £187.5 million.
In addition, the FI sells $200 million for lira on the spot currency markets at an exchange rate of $0.5533 to TRY => $200 million/0.5533 = TRY361,467,558.

At the end of the year, pound revenue from these loans will be £187.5(1.08) = £202.5 million and lira revenue from these loans will be TRY361,467,558 (1.10) = TRY397,614,314.
 

Then the dollar proceeds from the U.K. loan are:
£202.5 million x $1.60/£1 = $324 million or as a return
$324 million - $300 million = 8.00%
$300 million

and the dollar proceeds from the Turkish loan are:
TRY397,614,314 x $0.5533/TRY1 = $220 million or as a return
$220 million - $200 million = 10.00%
$200 million

Given this, the weighted return on the FI’s loan portfolio would be:
(0.5)(0.06) + (0.3)(0.08) + (0.2)(0.10) = 0.074, or 7.40%

This exceeds the cost of the FI’s CDs by 3.4 percent (7.4% - 4%).

2. Calculate the dollar proceeds from the FI’s loan portfolio at the end of the year, the return on the FI’s loan portfolio, and the net interest margin for the FI if the pound spot foreign exchange rate falls to $1.45/£1 and the lira spot foreign exchange rate falls to $0.52/TRY1 over the year.

At the end of the year, pound revenue from these loans will be £187.5(1.08) = £202.5 million and lira revenue from these loans will be TRY361,467,558 (1.10) = TRY397,614,314.

Then the dollar proceeds from the U.K. loan are:
£202.5 million x $1.45/£1 = $293.625 million or as a return
$293.625 million - $300 million = -2.125%
$300 million

and the dollar proceeds from the Turkish loan are:
TRY397,614,314 x $0.52/TRY1 = $206,759,443 or as a return
$206,759,443 - $200 million = 3.38%
$200 million

Given this, the weighted return on the FI’s loan portfolio would be:
(0.5)(0.06) + (0.3)(-0.02125) + (0.2)(0.0338) = 0.0304, or 3.04%

In this case, the FI actually has a loss or a negative interest margin (3.04% - 4% = -0.96%) on its balance sheet investments.

3. Calculate the dollar proceeds from the FI’s loan portfolio at the end of the year, the return on the FI’s loan portfolio, and the net interest margin for the FI if the pound spot foreign exchange rate rises to $1.70/£1 and the lira spot foreign exchange rate rises to $0.58/TRY1 over the year.

At the end of the year, pound revenue from these loans will be £187.5(1.08) = £202.5 million and lira revenue from these loans will be TRY361,467,558 (1.10) = TRY397,614,314.
 

Then the dollar proceeds from the U.K. investment are:
£202.5 million x $1.70/£1 = $344.25 million or as a return
$344.25 million - $300 million = 14.75%
$300 million

and the dollar proceeds from the Turkish loan are:
TRY397,614,314 x $0.58/TRY1 = $230,616,302 or as a return
$230,616,302 - $200 million = 15.31%
$200 million

Given this, the weighted return on the FI’s loan portfolio would be:
(0.5)(0.06) + (0.3)(0.1475) + (0.2)(0.1531) = 0.1049, or 10.49%

This exceeds the cost of the FI’s CDs by 6.49 percent (10.49% - 4%).

4. Suppose that instead of funding the $300 million investment in 8 percent British loans with U.S. CDs, the FI manager funds the British loans with $300 million equivalent one-year pound CDs at a rate of 5 percent and that instead of funding the $200 million investment in 10 percent Turkish loans with U.S. CDs, the FI manager funds the Turkish loans with $200 million equivalent one-year Turkish lira CDs at a rate of 6 percent. What will the FI’s balance sheet look like after these changes have been made?

The balance sheet of the FI would be as follows:

Assets Liabilities
$500 million $500 million
U.S. loans (6%) U.S. CDs (4%)
$300 million $300 million
U.K. loans (8%) U.K. CDs (5%)
(loans made in pounds) (deposits raised in pounds)
$200 million $200 million
Turkish loans (10%) Turkish CDs (6%)
(loans made in Turkish lira) (deposits raised in Turkish lira)

5. Using the information in part 4, calculate the return on the FI’s loan portfolio, the average cost of funds, and the net interest margin for the FI if the pound spot foreign exchange rate falls to $1.45/£1 and the lira spot foreign exchange rate falls to $0.52/TRY1 over the year.

As in part 2, when the pound falls in value to $1.45/£1 at the end of the year, pound revenue from the British loans is £187.5(1.08) = £202.5 million. When the lira falls in value to $0.52/TRY1 at the end of the year, lira revenue from the Turkish loans is be TRY361,467,558 (1.10) = TRY397,614,314.
 

Then the dollar proceeds from the U.K. loan are:
£202.5 million x $1.45/£1 = $293.625 million or as a return
$293.625 million - $300 million = -2.125%
$300 million

and the dollar proceeds from the Turkish loan are:
TRY397,614,314 x $0.52/TRY1 = $206,759,443 or as a return
$206,759,443 - $200 million = 3.38%
$200 million

and the weighted return on the FI’s loan portfolio would be:
(0.5)(0.06) + (0.3)(-0.02125) + (0.2)(0.0338) = 0.0304, or 3.04%

On the liability side of the balance sheet, at the beginning of the year, the FI borrows $300 million equivalent in pound CDs for one year at a promised interest rate of 5 percent. At an exchange rate of $1.60/£1, this is a pound equivalent amount of borrowing of $300 million/1.6 = £187.5 million.

At the end of the year, the FI must pay the pound CD holders their principal and interest, £187.5 million (1.05) = £196.875 million.

If the pound falls to $1.45/£1 over the year, the repayment in dollar terms would be
£196.875 million x $1.45/£1 = $285,468,750 or as a return
$285,468,750 - $300 million = -4.844%
$300 million

Additionally, the FI borrows $200 million equivalent in Turkish lira CDs for one year at a promised interest rate of 6 percent. At an exchange rate of $0.5533/TRY1, this is a lira equivalent amount of borrowing of $200 million/0.5533 = TRY361,467,558.

At the end of the year, the FI must pay the lira CD holders their principal and interest, TRY361,467,558 (1.06) = TRY383,155,612.

If the lira falls to $0.52/TRY1 over the year, the repayment in dollar terms would be
TRY383,155,612 x $0.52/TRY1 = $199,240,918 or as a return
$199,240,918 - $200 million = -0.38%
$200 million
Thus, at the end of the year,
Average cost of funds:
(0.5)(0.04) + (0.3)(-0.04847) + (0.2)(-0.0038) = 0.0047, or 0.47%
 


Net return:
Average return on assets - Average cost of funds
3.04% - 0.47% = 2.57%

6. Using the information in part 4, calculate the return on the FI’s loan portfolio, the average cost of funds, and the net interest margin for the FI if the pound spot foreign exchange rate rises to $1.70/£1 and the lira spot foreign exchange rate falls to $0.58/TRY1 over the year.

As in part 3, when the pound rises in value to $1.70/£1 at the end of the year, pound revenue from the British loans is £187.5(1.08) = £202.5 million.

Then the dollar proceeds from the U.K. loan are:
£202.5 million x $1.70/£1 = $344.25 million or as a return
$344.25 million - $300 million = 14.75%
$300 million

When the lira rises in value to $0.58/TRY1 at the end of the year, lira revenue from the Turkish loans is be TRY361,467,558 (1.10) = TRY397,614,314 and the dollar proceeds from the Turkish loan are:
TRY397,614,314 x $0.58/TRY1 = $230,616,302 or as a return
$230,616,302 - $200 million = 15.31%
$200 million

The weighted return on the FI’s loan portfolio would be:
(0.5)(0.06) + (0.3)(0.1475) + (0.2)(0.1531) = 0.1049, or 10.49%

On the liability side of the balance sheet, at the beginning of the year, the FI borrows $300 million equivalent in pound CDs for one year at a promised interest rate of 5 percent. At an exchange rate of $1.60/£1, this is a pound equivalent amount

Kết quả (Klingon) 1:

The U.K. securities would yield a higher return. Compared to the 12 percent return in the U.S., a U.S. investor could convert $1,000,000 to £666,667 and invest it at 9 percent. In one year the expected return of principal and interest is £726,667. If these pounds are sold forward at $1.6/£1, the investor will lock in $1,162,667 for a 16.27 percent return.Integrated Mini Case: Foreign Exchange Risk ExposureSuppose that a U.S. FI has the following assets and liabilities: Assets Liabilities $500 million $1,000 million U.S. loans (one year) U.S. CDs (one year) in dollars in dollars $300 million equivalent U.K. loans (one year) (loans made in pounds) $200 million equivalent Turkish loans (one year) (loans made in Turkish lira) The promised one-year U.S. CD rate is 4 percent, to be paid in dollars at the end of the year; the one-year, default risk–free loans in the United States are yielding 6 percent; default risk–free one-year loans are yielding 8 percent in the United Kingdom; and default risk–free one-year loans are yielding 10 percent in Turkey. The exchange rate of dollars for pounds at the beginning of the year is $1.6/£1, and the exchange rate of dollars for Turkish lira at the beginning of the year is $0.5533/TRY1.1. Calculate the dollar proceeds from the FI’s loan portfolio at the end of the year, the return on the FI’s loan portfolio, and the net interest margin for the FI if the spot foreign exchange rate has not changed over the year.legh bI'reS DIS, $ 300 'uy' ngev fi pounds chaDo'maq currency malja''e' DeSDu' rate tam $ 1.60 £ > $ 300 'uy' ghap 1.60 = £ 187.5 'uy' =.loQ addition $ 200 'uy' ngev fi lira chaDo'maq currency malja''e' DeSDu' tam rate $ 0.5533 nID > $ 200 'uy' ghap 0.5533 = try361, QInvam 467, 558, =.pItlh DIS, DeSDu' pound revenue vo' malja'lIj jay' ghaH £187.5(1.08) £ 202.5 'uy' lira 'ej = revenue vo' malja'lIj jay' ghaH try361, 467, 558 (1.10) try397, QInvam 614, 314, =. vaj dollar proceeds vo' u.k. malja'lIj jay':£ 202.5 'uy' x $ 1.60 ghap £ 1 $ 324 'uy' = pagh je chegh $ 324 'uy'-$ 300 'uy' 8.00 vatlhvI' = $ 300 'uy''ej dollar proceeds vo' turkish malja'lIj jay'.try397, 614, 314 x $ 0.5533 ghap try1 $ 220 'uy' = pagh je chegh $ 220 'uy'-$ 200 'uy' 10.00 vatlhvI' = $ 200 'uy'ghu'vam nob, ghaH ngI' chegh fi malja'lIj jay' portfolio:(0.5) (0.06) + (0.3)(0.08) + (0.2)(0.10) 0.074 pagh 7.40 vatlhvI' =fi cd cost exceeds ghu'vam pong 3.4 vatlhvI' (7.4 vatlhvI'-4 vatlhvI'). 2. dollar proceeds vo' fi malja'lIj jay' portfolio legh DIS, chegh fi malja'lIj jay' portfolio 'ej net Daj margin fi 'er'In SIm pum pound tam nov chaDo'maq rate $ 1.45 ghap £ 1 'ej pum lira tam nov chaDo'maq rate $ 0.52 ghap try1 DIS rIn.pItlh DIS, DeSDu' pound revenue vo' malja'lIj jay' ghaH £187.5(1.08) £ 202.5 'uy' lira 'ej = revenue vo' malja'lIj jay' ghaH try361, 467, 558 (1.10) try397, QInvam 614, 314, =.Then the dollar proceeds from the U.K. loan are:£202.5 million x $1.45/£1 = $293.625 million or as a return $293.625 million - $300 million = -2.125% $300 millionand the dollar proceeds from the Turkish loan are:TRY397,614,314 x $0.52/TRY1 = $206,759,443 or as a return $206,759,443 - $200 million = 3.38% $200 millionGiven this, the weighted return on the FI’s loan portfolio would be:(0.5)(0.06) + (0.3)(-0.02125) + (0.2)(0.0338) = 0.0304, or 3.04%In this case, the FI actually has a loss or a negative interest margin (3.04% - 4% = -0.96%) on its balance sheet investments. 3. Calculate the dollar proceeds from the FI’s loan portfolio at the end of the year, the return on the FI’s loan portfolio, and the net interest margin for the FI if the pound spot foreign exchange rate rises to $1.70/£1 and the lira spot foreign exchange rate rises to $0.58/TRY1 over the year.At the end of the year, pound revenue from these loans will be £187.5(1.08) = £202.5 million and lira revenue from these loans will be TRY361,467,558 (1.10) = TRY397,614,314. Then the dollar proceeds from the U.K. investment are:£202.5 million x $1.70/£1 = $344.25 million or as a return $344.25 million - $300 million = 14.75% $300 millionand the dollar proceeds from the Turkish loan are:TRY397,614,314 x $0.58/TRY1 = $230,616,302 or as a return $230,616,302 - $200 million = 15.31% $200 millionGiven this, the weighted return on the FI’s loan portfolio would be:(0.5)(0.06) + (0.3)(0.1475) + (0.2)(0.1531) = 0.1049, or 10.49%This exceeds the cost of the FI’s CDs by 6.49 percent (10.49% - 4%). 4. Suppose that instead of funding the $300 million investment in 8 percent British loans with U.S. CDs, the FI manager funds the British loans with $300 million equivalent one-year pound CDs at a rate of 5 percent and that instead of funding the $200 million investment in 10 percent Turkish loans with U.S. CDs, the FI manager funds the Turkish loans with $200 million equivalent one-year Turkish lira CDs at a rate of 6 percent. What will the FI’s balance sheet look like after these changes have been made?The balance sheet of the FI would be as follows: Assets Liabilities $500 million $500 million U.S. loans (6%) U.S. CDs (4%) $300 million $300 million U.K. loans (8%) U.K. CDs (5%) (loans made in pounds) (deposits raised in pounds) $200 million $200 million Turkish loans (10%) Turkish CDs (6%) (loans made in Turkish lira) (deposits raised in Turkish lira) 5. Using the information in part 4, calculate the return on the FI’s loan portfolio, the average cost of funds, and the net interest margin for the FI if the pound spot foreign exchange rate falls to $1.45/£1 and the lira spot foreign exchange rate falls to $0.52/TRY1 over the year.As in part 2, when the pound falls in value to $1.45/£1 at the end of the year, pound revenue from the British loans is £187.5(1.08) = £202.5 million. When the lira falls in value to $0.52/TRY1 at the end of the year, lira revenue from the Turkish loans is be TRY361,467,558 (1.10) = TRY397,614,314. Then the dollar proceeds from the U.K. loan are:£202.5 million x $1.45/£1 = $293.625 million or as a return $293.625 million - $300 million = -2.125% $300 millionand the dollar proceeds from the Turkish loan are:TRY397,614,314 x $0.52/TRY1 = $206,759,443 or as a return $206,759,443 - $200 million = 3.38% $200 millionand the weighted return on the FI’s loan portfolio would be:(0.5)(0.06) + (0.3)(-0.02125) + (0.2)(0.0338) = 0.0304, or 3.04%On the liability side of the balance sheet, at the beginning of the year, the FI borrows $300 million equivalent in pound CDs for one year at a promised interest rate of 5 percent. At an exchange rate of $1.60/£1, this is a pound equivalent amount of borrowing of $300 million/1.6 = £187.5 million.At the end of the year, the FI must pay the pound CD holders their principal and interest, £187.5 million (1.05) = £196.875 million.If the pound falls to $1.45/£1 over the year, the repayment in dollar terms would be £196.875 million x $1.45/£1 = $285,468,750 or as a return $285,468,750 - $300 million = -4.844% $300 millionAdditionally, the FI borrows $200 million equivalent in Turkish lira CDs for one year at a promised interest rate of 6 percent. At an exchange rate of $0.5533/TRY1, this is a lira equivalent amount of borrowing of $200 million/0.5533 = TRY361,467,558.At the end of the year, the FI must pay the lira CD holders their principal and interest, TRY361,467,558 (1.06) = TRY383,155,612.If the lira falls to $0.52/TRY1 over the year, the repayment in dollar terms would be TRY383,155,612 x $0.52/TRY1 = $199,240,918 or as a return $199,240,918 - $200 million = -0.38% $200 millionThus, at the end of the year, Average cost of funds:(0.5)(0.04) + (0.3)(-0.04847) + (0.2)(-0.0038) = 0.0047, or 0.47%  Net return:Average return on assets - Average cost of funds 3.04% - 0.47% = 2.57%6. Using the information in part 4, calculate the return on the FI’s loan portfolio, the average cost of funds, and the net interest margin for the FI if the pound spot foreign exchange rate rises to $1.70/£1 and the lira spot foreign exchange rate falls to $0.58/TRY1 over the year.As in part 3, when the pound rises in value to $1.70/£1 at the end of the year, pound revenue from the British loans is £187.5(1.08) = £202.5 million. Then the dollar proceeds from the U.K. loan are:£202.5 million x $1.70/£1 = $344.25 million or as a return $344.25 million - $300 million = 14.75% $300 millionWhen the lira rises in value to $0.58/TRY1 at the end of the year, lira revenue from the Turkish loans is be TRY361,467,558 (1.10) = TRY397,614,314 and the dollar proceeds from the Turkish loan are:TRY397,614,314 x $0.58/TRY1 = $230,616,302 or as a return
$230,616,302 - $200 million = 15.31%
$200 million

The weighted return on the FI’s loan portfolio would be:
(0.5)(0.06) + (0.3)(0.1475) + (0.2)(0.1531) = 0.1049, or 10.49%

On the liability side of the balance sheet, at the beginning of the year, the FI borrows $300 million equivalent in pound CDs for one year at a promised interest rate of 5 percent. At an exchange rate of $1.60/£1, this is a pound equivalent amount