A German bank issues a one-year €2,000,000 CD at 2%. It uses these funds to make...
A German bank issues a one-year €2,000,000 CD at 2%. It uses these funds to make a one-year US $- denominated loan to ABC Corporation at 4%. Current exchange rate is $1.15/€. The one-year forward rate (F$/€) = $1.17/€. What are the bank's loan proceeds (in $s) from the loan (i.e. how much will the German bank receive in one-year from the loan)?
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$2,300,000
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$2,392,000
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$2,080,000
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$1,808,696
Homework Answers
Step1 - At the beginning, sell €2,000,000 for dollars on the current exchange rate at $1.15/€.
Step2 - It will be $2,300,000.
Step 3 - Lend the sum at 4% for one year.
Step 4 - At the end of the year, the revenue would be $2,392,000.
Answer :- Bank loan proceeds in $ would be 2,392,000
In case, you want to get euros for dollars, use the exchange rate of $1.17/€.
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