Ion National Bank issues a 6-month, USD1 million CD at 4.0% and funds a loan in Argentine pesos (ARS) at 6.50%. The spot rate for the ARS was ARS2.27 per USD at the time of the transaction. In 6 months, the ARS will have depreciated to ARS2.30 per USD. What is the realized nominal annual spread on the loan?
 
A. -1.07%.
 
B. -0.19%.
 
C. 0.11%.
 
D. 0.13%.
 
Answer:B
 
USD 10,000,000 x 1 / 1.42 = GBP7,042,254 x 1.12 x USD 1.40/GBP = USD 11,042,254;
 
(11,042,254- 10,000,000) / 10,000,000 = 10.42%; (0.5)(0.08) + (0.5)(0.1042) = 9.21%

 
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