A USFI Is Raising All of Its $20 Million Liabilities in

question 40

Multiple Choice

$\begin{array}{lrr}\text { Assets } &\text {Liabilities} \\& \text { \$ 10 million U.S. loans(10 percent) } & \text { \$ 20 million U.S. CDs(9 percent) } \\ &\text { \$ 10 million UK loans (16 percent) } &\\ &\text { (loans made in sterling) } &\\\end{array}$
A U.S.FI is raising all of its $20 million liabilities in dollars (one-year CDs) but investing 50 percent in U.S.dollar assets (one-year maturity loans) and 50 percent in UK pound sterling assets (one-year maturity loans) .Suppose the promised one-year U.S.CD rate is 9 percent,to be paid in dollars at the end of the year,and that one-year,credit risk-free loans in the United States are yielding only 10 percent.Credit risk-free one-year loans are yielding 16 percent in the United Kingdom.

If the exchange rate had fallen from $1.60/ $\le$ 1 at the beginning of the year to $1.50/ $\le$ 1 at the end of the year,the net interest margin for the FI on its balance sheet investments is

• A)3.2875%.
• B)-3.2875%.
• C)4%.
• D)8.75%.
• E)0.375%.

---

Definitions:

Breach

A violation or infraction of a law, duty, or agreement.

Illusory Contract

An agreement that lacks a real obligation from one or more parties, making it unenforceable.

Implied

Describes something that is suggested or understood without being directly expressed or stated.

Conditions

Terms or elements in contracts that affect how parties' responsibilities are enforced or interpreted.