Problem
Assume that a US bank has assets located in London worth £150 million on which it earns an average of 8% per year. The bank has £100 million in liabilities on which it pays an average of 6% per year. The current spot rate is £1 = $1.50
i. If the exchange rate at the end of the year is £1 = $1.25, will the US dollar have appreciated or depreciated against the pound?
ii. Is the bank net short or net long? Given the change in the exchange rate, will the bank make money or lose money?