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Question
Assume that instead of investing in Euro bonds at a fixed rate of 6.5 percent, the FI invests them in variable rates of LIBOR + 1.5 percent, reset every six months. The current LIBOR rate is 5 percent. Assume both interest and principal will be reinvested in six months. Assume the exchange rate remains at 1.75/$ at the end of the year. What should be the LIBOR rates in six months in order for the bank to earn a 1 percent spread?
A. 5.25 percent.
B. 5.48 percent.
C. 5.76 percent.
D. 5.86 percent.
E. 5.94 percent.
Answer
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