Bankone issued $200 million worth of one-year CD liabilities

6.Sun Bank USA has purchased a 16 million one-year Australian dollar loan that pays 12 percent interest annually. The spot rate of U.S. dollars for Australian dollars is $0.625/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 10 percent. The current spot rate of U.S. dollars for British pounds is $1.60/£1
a. 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 $0.588/A$1 and $1.848/£1, respectively?
b. 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 $200,000 (disregarding any change in principal values)?

2.Suppose you purchase a Treasury bond futures contract at a price of 95 percent of the face value, $100,000. (LG 10-3)

a. What is your obligation when you purchase this futures contract?
b. Assume that the Treasury bond futures price falls to 94 percent. What is your loss or gain?
c. Assume that the Treasury bond futures price rises to 97. What is your loss or gain?
6.You have taken a long position in a call option on IBM common stock. The option has an exercise price of $136 and IBM’s stock currently trades at $140. The option premium is $5 per contract.
a. What is your net profit on the option if IBM’s stock price increases to $150 at expiration of the option and you exercise the option?
b. How much of the option premium is due to intrinsic value versus time value?
c. What is your net profit if IBM’s stock price decreases to $130?

14.A commercial bank has $200 million of floating-rate loans yielding the T-bill rate plus 2 percent. These loans are financed with $200 million of fixed-rate deposits costing 9 percent. A savings bank has $200 million of mortgages with a fixed rate of 13 percent. They are financed with $200 million in CDs with a variable rate of T-bill rate plus 3 percent. (LG 10-7)

a. Discuss the type of interest rate risk each institution faces.
b. Propose a swap that would result in each institution having the same type of asset and liability cash flows.
c. Show that this swap would be acceptable to both parties.