20 A bank purchases a six-month $4 million Eurodollar deposit at an interest rat

Question

20

A bank purchases a six-month $4 million Eurodollar deposit at an interest rate of 8.5 percent per year. It invests the funds in a six-month Swedish krona bond paying 9.5 percent per year. The current spot rate of U.S. dollars for Swedish krona is $0.1800/SKr.

The six-month forward rate on the Swedish krona is being quoted at $0.1810/SKr. What is the net spread earned for six months on this investment if the bank covers its foreign exchange exposure using the forward market? (per 6 months)

Select one:

a. 1.082

b. 2.154

c. 0.754

d. 1.582

Explanation / Answer

All The answer given in it are incorrect

Deposit taken by bank $4 Interest paid of 6 months @8.5% p.a 0.17 Total amount Paid after 6 months $4.170 Convert $ into kr 0.1800$ / SKr Therefore Now $4 = 22.2222SKr Now invest swedish krona @9.5% Interest received After 6 months 1.055556 Principal of bond 22.2222 Total Amount of SKr received after 6m 23.27776 Now convert SKr into dollar after 6 months @0.1810$ / Skr Now dollar received after 6 months $4.2132 Net Profit After Paying loan in 6 months $0.0432 Present Value of $4.2132 @ 4.25% $4.04 Value of loan after 6 months $4.17 Now If get 23.27776 in 4.17$ then exchange rate is 0.179141 Now net spread diffrence per Skr in $ is 0.181-0.17914 0.00186

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