Problem:
Sun Bank USA has purchased a 16 million one-year Australian dollar loan that pays 13 percent interest annually. The spot rate of U.S. dollars for Australian dollars is $0.6250/A$1. It has funded this loan by accepting a British pound (BP)-denominated deposit for the equivalent amount and maturity at an annual rate of 11 percent. The current spot rate of U.S. dollars for British pounds is $1.6000/£1.
Required:
Question 1: What is the net interest income earned in dollars on this one-year transaction if the spot rate of U.S. dollars for Australian dollars and U.S. dollars for BPs at the end of the year are $0.5880/A$1 and $1.8500/£1, respectively?
Question 2: What should the spot rate of U.S. dollars for BPs be at the end of the year in order for the bank to earn a net interest income of $210,000 (disregarding any change in principal values)?
Note: Please show how to work it out.