Sun Bank USA has purchased a 16 million one-year Australian dollar loan that pay

Question

Sun Bank USA has purchased a 16 million one-year Australian dollar loan that pays 12 percent interest annually. The spot rate of U.S. dollars for Australian dollars is $0.6250/A$1. It has funded this loan by accepting a British pound (BP)–denominated deposit for the equivalent amount and maturity at an annual rate of 10 percent. The current spot rate of U.S. dollars for British pounds is $1.6000/£1.

What is the net interest income earned in dollars on this one-year transaction if the spot rate of U.S. dollars for Australian dollars and U.S. dollars for BPs at the end of the year are $0.5880/A$1 and $1.8480/£1, respectively? (Negative amount should be indicated by a minus sign.)

What should the spot rate of U.S. dollars for BPs be at the end of the year in order for the bank to earn a net interest income of $200,000 (disregarding any change in principal values)? (Round your answer to 4 decimal places. (e.g., 32.1616))

Sun Bank USA has purchased a 16 million one-year Australian dollar loan that pays 12 percent interest annually. The spot rate of U.S. dollars for Australian dollars is $0.6250/A$1. It has funded this loan by accepting a British pound (BP)–denominated deposit for the equivalent amount and maturity at an annual rate of 10 percent. The current spot rate of U.S. dollars for British pounds is $1.6000/£1.

Explanation / Answer

a)

i) Interest income on the 16 million one-year Australian dollar loan that pays 12 percent interest annually.

= 16,000,000 * 0.12 = 1,920,000A$; $ equivalent at the end of the year = 1,920,000*0.5880 = $1,128,960.

ii) Amount of deposit accepted in GBP = 16,000,000*0.6250/1.6000 = 6,250,000GBP

Interest payment on the deposit = 6,250,000*0.1 = 625,000GBP

Equivalent $ value of the interest = 625,000*1.8480 = 1,155,000.

Therfore, net interest income = 1128960 - 1155000 = -$26,040

b) If net interest income is to be $200,000, the $ value of the interest expense should be 928,960.

for this the exchange rate should be 928960/625000 = 1.4863

The rate should be 1.4863$/GBP

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