Assume that a bank has assets located in the EU worth 101 million euros, on which it earns an average of 9% per year. The bank has 76 million Euros in liabilities on which pays an average of 5% per year. The spot exchange rate is 0.76 euros/$.
a. If the exchange rate at the end of the year is 0.79 euros/$, will the dollar have appreciated or depreciated against the euro ?
b. Given the change in the exchange rate, what is the effect in dollars on the net interest income from foreign assets and liabilities ?