North Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange risk. In a recent transaction, it issued a one-year $1.75 million CD at 4 percent and is planning to fund a loan in British pounds at 6 percent for a 2 percent expected spread. The spot rate of U.S. dollars for British pounds is $1.450/£ 1. However, new information now indicates that the British pound will appreciate such that the spot rate of U.S. dollars for British pounds is $1.430/£ 1 by year-end. Calculate the loan rate to maintain the 2 percent spread.

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24-06-2024
Social Studies

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North Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange risk. In a recent transaction, it issued a one-year $1.75 million CD at 4 percent and is planning to fund a loan in British pounds at 6 percent for a 2 percent expected spread. The spot rate of U.S. dollars for British pounds is $1.450/£ 1. However, new information now indicates that the British pound will appreciate such that the spot rate of U.S. dollars for British pounds is $1.430/£ 1 by year-end. Calculate the loan rate to maintain the 2 percent spread.

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