What are the four FX trading activities undertaken by FIs? How do FIs profit from these activities? What are the reasons for the slow growth in FX profits at major banks?
City Bank issued $200 million of one-year CDs in the United States at a rate of 6.50 per cent. It invested part of this money, $100 million, in the purchase of a one-year bond issued by an Australian firm at an annual rate of 7 per cent. The remaining $100 million was invested in a one-year Brazilian government bond paying an annual interest rate of 8 per cent. The exchange rate at the time of the transactions was Brazilian real (BRL) 1/$1.
a. What will be the net return on this $200 million investment in bonds if the exchange rate between the Brazilian real and the Australian dollar remains the same?
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b. What will be the net return on this $200 million investment if the exchange rate changes to BRL1.20/$1?
c. What will the net return on this $200 million investment be if the exchange rate changes to BRL0.80/$1?