Sun Bank USA has purchased a 16 million one-year Australian dollar loan that pay

Question

Sun Bank USA has purchased a 16 million one-year Australian dollar loan that pays 15 percent interest annually. The spot rate of U.S. dollars for Australian dollars is $0.6250/A$1. It has funded this loan by accepting a British pound (BP)–denominated deposit for the equivalent amount and maturity at an annual rate of 13 percent. The current spot rate of U.S. dollars for British pounds is $1.6000/£1.

What is the net interest income earned in dollars on this one-year transaction if the spot rate of U.S. dollars for Australian dollars and U.S. dollars for BPs at the end of the year are $0.5880/A$1 and $1.4500/£1, respectively? (Negative amount should be indicated by a minus sign.)

What should the spot rate of U.S. dollars for BPs be at the end of the year in order for the bank to earn a net interest income of $250,000 (disregarding any change in principal values)? (Round your answer to 4 decimal places. (e.g., 32.1616))

What is the net interest income earned in dollars on this one-year transaction if the spot rate of U.S. dollars for Australian dollars and U.S. dollars for BPs at the end of the year are $0.5880/A$1 and $1.4500/£1, respectively? (Negative amount should be indicated by a minus sign.)

Explanation / Answer

a. Interest income from deposits in BPs =16 millions *13%

= 2.08 millions i.e 2080000

Interest income in $ = 2080000 * 1.45 = $3016000

Interest expenses in Australian dollars = 16 millions * 15%

= 2.4 millions i.e 2400000

Interest expenses in US Dollars = 2400000 *0.5880

= $1411200

Net interest income = $3016000 -  $1411200 = $1604800

b. Net interest income = $250000

spot rate = $1.426 / BP

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