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

question 108

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.

The weighted return on the bank's portfolio of investments would be

• A)15%.
• B)12%.
• C)16%.
• D)13%.

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Definitions:

Initial Endowment

The initial quantity of goods, services, and assets that an individual, organization, or economy possesses.

Pareto Optimal

An allocation of resources from which it is impossible to reallocate without making at least one individual worse off.

Utility Function

A mathematical representation that captures the level of satisfaction or happiness that consumers derive from consuming goods and services.

Initial Endowment

The original distribution of resources, wealth, or abilities that individuals or groups possess in an economic model.