Today is Jan. 1, 2016. Bonner Bank has purchased a 5 million one-year Swiss franc (Sf) security that pays 6% interest annually. The current spot rate of U.S. dollars for Swiss francs is $0.9691/Sf. It has funded the purchase of this investment by accepting a Canadian dollar (CD)-denominated deposit for the equivalent amount and maturity at an annual rate of 4%. The current spot rate of U.S. dollars for Canadian dollars is $0.9622/CD.
a. How many CDs must Bonner Bank borrow (i.e., the amount of the (CD)-denominated deposit) to purchase the 5,000,000 Sf security? (Round to the nearest whole number).
b. 1-year later (Jan 1, 2017), the Swiss Franc security and the CD-denominated deposit are matured. The current spot exchange rates are: $0.9825/Sf and $0.9588/CD.
1. What is the interest revenue (in dollars) earned by Bonner Bank on the Swiss investment? (Round to the nearest whole number).
2. What is the interest expense (in dollars) paid by Bonner Bank on the CD-denominated deposit? (Round to the nearest whole number).
3. What is the net interest income earned by Bonner Bank? (Round to the nearest whole number).
c. What should the spot rate of U.S. dollars for CDs be at year end in order for the bank to earn a net interest income of $125,000 (disregarding any change in principal values)? (Carryout to four decimal places).
d. In part b, you ignored the affect exchange rates have on the principal balances. Taking into account exchange rate fluctuations on principal balances, how much did Bonner Bank earn or lose due to FX appreciation or depreciation on each currency? (Round to the nearest whole number).