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Question
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.
If the spot foreign exchange rate remains constant at $1.60 to ≤1 throughout the year, the return from the U.K. investment will be
A. 15%.
B. 12%.
C. 16%.
D. 13%.
E. 7%.
Answer
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