A bank purchases a six-month $2 million Eurodollar deposit at an interest rate o

Question

A bank purchases a six-month $2 million Eurodollar deposit at an interest rate of 7.4 percent per year. It invests the funds in a six-month Swedish krona bond paying 8.0 percent per year. The current spot rate of U.S. dollars for Swedish krona is $0.1790/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? (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616))

At what forward rate will the spread be only 1 percent per year? (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616))

A bank purchases a six-month $2 million Eurodollar deposit at an interest rate of 7.4 percent per year. It invests the funds in a six-month Swedish krona bond paying 8.0 percent per year. The current spot rate of U.S. dollars for Swedish krona is $0.1790/SKr.

Explanation / Answer

Principal = 2*(1+7.4%/2) = 2.074

convert to sweedish

2 / 0.1790 = 11.1732 million

Invest at 8%

Value = 11.1732*(1+8%/2) = 11.6201

Convert back to $

$ value = 11.6201*0.1810 = 2.1032

Spread = (2.1032 - 2.0740 ) / 2 = 1.46% (6 months) = 2.92% annual

2)

Spread = 1% = 0.5% semi annual

Then future investment = 0.5%*2 + 2.074 = 2.084

now

11.6201* X = 2.084

X = 2.084 / 11.6201 = 0.1793

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