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A US bank has made two term loans: one in $ (to a US borrower)...

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Finance

A US bank has made two term loans: one in $ (to a US borrower) and the other in (to a UK borrower). The bank charges an 11% interest rate on these loans. Both loans have face values of $600 and one-year maturity. To fund the two loans, the bank issued one-year US dollar CD with an interest rate of 8%. To hedge FX risks owning to a weaker against $ when the UK loan matures, the bank negotiated with a FX dealer to enter into a forward contract, which allows to sell at a forward rate of $1.98 per one year from now.

Assuming the spot rate to be $2 per ,

1) what will be the profit on this UK loan? (10 points)

2) What will be the insurance cost of using this forward contract to hedge the FX risk stemming from the UK loan? (5 points)

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