23-1 A bank purchases a six-month $3 million Eurodollar deposit at an interest r

Question

23-1 A bank purchases a six-month $3 million Eurodollar deposit at an interest rate of 7.3 percent per year. It invests the funds in a six-month Swedish krona bond paying 7.5 percent per year. The current spot rate of U.S. dollars for Swedish krona is $0.1800/SKr. a. 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))

Net spread = NEED ANSWER .0676 % IS WRONG

Explanation / Answer

Interest plus principal expense on six month CD = 3000000*(1+ 0.073/2) = $ 3109500 Interest and principal earned on Swedish Bond = 3000000/0.18 = 16666667 *(1+ 0.075/2) 17291667 In dollars of hedged = 17291667*0.1810 3129792 Spread = (3129792-3109500)/3000000 0.6764% 1.3528% The spread is 0.6764% for six months and 1.3528% per year

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