23-2 A British bank issues a $200 million, three-year Eurodollar CD at a fixed a
ID: 2656488 • Letter: 2
Question
23-2
A British bank issues a $200 million, three-year Eurodollar CD at a fixed annual rate of 9 percent. The proceeds of the CD are lent to a British company for three years at a fixed rate of 11 percent. The spot exchange rate of pounds for U.S. dollars is £1.50/US$.
What are the cash flows if exchange rates are unchanged over the next three years? (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places. (e.g., 32.16))
A British bank issues a $200 million, three-year Eurodollar CD at a fixed annual rate of 9 percent. The proceeds of the CD are lent to a British company for three years at a fixed rate of 11 percent. The spot exchange rate of pounds for U.S. dollars is £1.50/US$.
a-2. What are the cash flows if exchange rates are unchanged over the next three years? (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places. (e.g 32.16)) Eurodollar CD British Loan t Cash Outflow (U.S.S) Cash Inflow (£) Spread (E) million million million million million million million million million million million million 2 b. If the U.S. dollar is expected to appreciate against the pound to £1.65/$1, £1.815/$1, and £2.00/$1 over the next three years, respectively, what will be the cash flows on this transaction? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places. (e.g., 32.16)) Eurodollar CD British Loan t Cash Outflow (U.S.$) Cash Inflow (E) Spread (E) million million million million million million million million million million million million 2 3 c. If the British bank swaps U.S. dollar payments for British pound payments at the current spot exchange rate, what are the cash flows on the swap and on the entire hedged position? Assume that the U.S. dollar appreciates at the same rates as in part (b). (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places.(e.g., 32.16)) Net Swap Cash Flow Cash Flow Swap Payments Total Cash Flow (£) million million million million million million million million million million million million 2 3Explanation / Answer
a 1) yes it is profitable as the spread is 11-9 = 2 % a2) calculations t Eurodollar CD British loan Eurodollar CD British loan cash outflow US $ £ cash inflow£ spread £ cash outflow US $ £ cash inflow£ spread £ 1 18 27 33 6 200*9% B6*1.5 200*1.5*11% E6-C6 2 18 27 33 6 3 218 327 333 6 b) t Eurodollar CD British loan cash outflow US $ £ cash inflow£ spread £ 1 18 29.7 33 3.3 B15*1.65 2 18 32.67 33 0.33 3 218 436 333 -103 c) cash flow £ swap payments £ net swap cash flow £ total cash flow £ 1 29.7 27 2.7 6 2 32.67 27 5.67 6 3 436 327 109 6
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