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Bankone issued $200 million worth of one-year CD liabilities in Brazilian reals at a rate of 6.50 percent. The exchange rate of U.S. dollars for Brazilian reals at the time of the transaction was $0.305/Br 1. (LG 9-5) Is Bankone exposed to an appreciation or depreciation of the U.S. dollar relative to the Brazilian real? What will be the percentage cost to Bankone on this CD if the dollar depreciates relative to the Brazilian real such that the exchange rate of U.S. dollars for Brazilian reals is $0.325/Br 1 at the end of the year? page 308 What will be the percentage cost to Bankone on this CD if the dollar appreciates relative to the Brazilian real such that the exchange rate of U.S. dollars for Brazilian reals is $0.285/Br 1 at the end of the year?

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Answer:

A. The depreciation are been issued in reals and the interest as well as the principle are both being paid in reals. Although $ is actually the problem because that is where all the risk lies due to the fact that It will take more dollars to pay back compared to the real

B)

1.Brazilian = $69,225,000

2.Percentage cost -65.4%

C1. Brazilian $60,705,000

2)Percentage cost - 69.6%.

Explanation:

A. The depreciation are been issued in reals and the interest as well as the principle are both being paid in reals. Although $ is actually the problem because that is where all the risk lies due to the fact that It will take more dollars to pay back compared to the real.

B)

1.Brazilian 200M x (1.065) x 0.325

= $69,225,000

2.Percentage cost = ($69,225,000 - $200,000,000) / 200m

=-$130,775,000/$200,000,000

= -65.4%

C

1. Brazilian 200M x (1.065) x 0.285

= $60,705,000

2)Percentage cost = ($60,705,000 - $200,000,000) / $200M

=-$139,295,000/$200,000,000

= -69.6%.

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