Patriot Bank USA purchased a euro 20 million one-year euro loan that pays 15 percent interest The spot rate of U S. dollars per euro is 1.15. Sun Bank has funded this loan by a British pound-denominated deposit for the equivalent amount and maturity at an rate of 12 percent. The current spot rate of U.S. dollars per British pound is 1.30.
a. What is the net interest income earned in dollars on this one-year transaction if the spot rates of U.S. dollars per euro and U.S. dollars per British pound at the end of the year are 1.25 and 1.40?
b. What is the net return on the loan?