A USFI Is Raising All of Its $20 Million Liabilities in

$\begin{array}{lrr}\text { Assets } &\text {Liabilities} \\& \text { \$ 10 million U.S. loans(10 percent) } & \text { \$ 20 million U.S. CDs(9 percent) } \\ &\text { \$ 10 million UK loans (16 percent) } &\\ &\text { (loans made in sterling) } &\\\end{array}$
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 UK 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 exchange rate had fallen from $1.60/ $\le$ 1 at the beginning of the year to $1.50/ $\le$ 1 at the end of the year when the FI needed to repatriate the principal and interest on the loan.What would the dollar loan revenues at the end of the year be as a return on the original dollar investment?

A) 13%.
B) 12.55%.
C) 16%.
D) 8.75%.

Correct Answer:

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