A bank issues a one-year loan worth DM16 million with an annual interest rate of 12%. The spot exchange rate of DM isDM1.6 / $. To finance the loan, the bank takes a deposit in Sterling with the same maturity date as the loan and pays an annual interest rate of 10%, currently at $1.6/&.

 (1). If the exchange rate at year-end maturity is DM1.7/S and $1.85/& respectively, what is the net interest earned on this transaction. 

(2). What should the current exchange rate for sterling be for a bank to achieve a 4 per cent net interest margin?