Your USBank Issues a One-Year U

Multiple Choice

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 US $0.78493 per Canadian dollar. What is the end-of-year profit or loss to the bank if in one year the exchange rate falls to US $0.765 per Canadian dollar? (Assume that there is no change in interest rates.)

A) Loss of US $75,000.
B) Profit of C $274,000.
C) Loss of US $7,000.
D) Profit of C $9,000.
E) Loss of US $5,000.