Assume that a bank has assets located in London worth £150 million on which it earns an average of 8 percent per year. The bank has £100 million in liabilities on which it pays an average of 6 percent per year. The current spot exchange rate is £2/$.
a. Given new exchange rate is £1.80/$ what is the effect in dollars on the net interest income from the foreign assets and liabilities? Note: The net interest income is interest income minus interest expense
b. What is the effect of the exchange rate change on the value of assets and liabilities in dollars?