Net interest income earned in dollar on one-year transaction

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Reference no: EM132039233

Sun Bank USA has purchased a 32 million one-year Australian dollar loan that pays 12 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 10 percent. The current spot rate of U.S. dollars for British pounds is $1.6000/£1.

a. 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 $1.8500/£1, respectively? (Negative amount should be indicated by a minus sign.)

Net interest income $

b. 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 $340,000 (disregarding any change in principal values)? (Round your answer to 4 decimal places. (e.g., 32.1616))

Spot rate of U.S. dollars $

Reference no: EM132039233

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