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Question
A U.S. FI has U.S. $200 million worth of one-year loans earning an average rate of return of 6%. The FI also has one-year single payment Canadian dollar loans of C$110 million earning 8%. The FI's funding source is $300 million in U.S.$ one-year CDs, on which they are paying 4%. Initially the exchange rate is C$1.10 per $1 U.S. The one-year forward rate is C$1.14 per $1 U.S. What is the bank's dollar % spread if they hedge fully using forwards?
Answer
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