A US FI Is Raising All of Its $20 Million Liabilities

question 38

Multiple Choice

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 U.K. 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.
-What amount, in sterling, will the FI have to repatriate back to the U.S. after one year if the exchange rate remains constant at $1.60 to ≤1.

• A)≤6.25 million.
• B)≤7.875 million.
• C)≤7.25 million.
• D)≤6.625 million.
• E)≤11.26 million.

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Definitions:

Simple Interest

Interest earned or paid on the original principal only of a deposit or loan, without compounding.

Loan Repaid

The act of paying back borrowed money to the lender.

Borrowed

The state of having taken something on loan, often with the obligation to return it or repay an equivalent amount.

Annual Rate

The interest rate for a whole year, as opposed to just a monthly or daily rate.