Your USBank Issues a One-Year U

Your U.S.bank issues a one-year U.S.CD at 5 percent annual interest to finance a C $1.274 million (Canadian dollar) investment in two-year,fixed rate Canadian bonds selling at par and paying 7 percent annually.You expect to liquidate your position in one year.Currently,spot exchange rates are U.S.$0.78493 per Canadian dollar.

What is the end-of-year profit or loss to the bank if in one year Canadian bond rates increase to 7.538 percent? (Assume no change in either current U.S.interest rates or current exchange rates,U.S.$0.78493/C $1. )

A) Loss of U.S.$5,000.
B) Profit of U.S.$15,000.
C) Loss of C $119,000.
D) Profit of C $50,000.

Correct Answer:

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