Response to the following problem:
East Bank has purchased a 5 million one-year Swiss franc (Sf ) loan that pays 6 percent interest annually. The spot rate of U.S. dollars for Swiss francs is 0.9691. It has funded this loan by accepting a Canadian dollar (C$)-denominated deposit for the equivalent amount and maturity at an annual rate of 4 percent. The current spot rate of U.S. dollars for Canadian dollars is 0.9622.
a. What is the net interest income earned in dollars on this one-year transaction if the spot rate of U.S. dollars for Sfs and U.S. dollars for C$s at the end of the year are 0.9825 and 0.9588, respectively?
b. What should the spot rate of U.S. dollars for C$s be in order for the bank to earn a net interest income of $125,000 (disregarding any change in principal values)?