Question

Suppose that instead of funding the $100 million investment in 12 percent British loans with U.S. CDs, the FI manager in problem 15 funds the British loans with $100 million equivalent one-year pound CDs at a rate of 8 percent. Now the balance sheet of the FI would be as follows:

a. Calculate the return on the FI’s investment portfolio, the average cost of funds, and the net interest margin for the FI if the spot foreign exchange rate falls to $1.45/£1 over the year.

b. Calculate the return on the FI’s investment portfolio, the average cost of funds, and the net interest margin for the FI if the spot foreign exchange rate rises to $1.70/£1 over the year.

Answer 1

Answer:

Step 1:

Net return from investment portfolio

Investment portfolio basically involves pool of investments through which investor strives to ascertain income or make profit with an aim to keep his capital or principal amount safe. Thus the securities underlying such portfolio are selected on the basis of robust combination of risk and associated rewards. Since low risk security would yield low return and vice- versa.

Step 2:

[ Find attachment 1]

Step 3 :

[ Find attachment 2]

Note: I have added entries of question in the question for help