A US Bank Issues a 1-Year, $1 Million U

Multiple Choice

A U.S. bank issues a 1-year, $1 million U.S. CD at 5 percent annual interest to finance a C$1.274 million investment in 2-year fixed-rate Canadian bonds selling at par and paying 7 percent annually. The U.S. bank expects to liquidate its position in 1 year upon maturity of the CD. Spot exchange rates are US$0.78493 per Canadian dollar. The U.S. bank's position is exposed to:

A) interest rate risk only.
B) credit risk only.
C) exchange rate risk only.
D) interest rate and exchange rate risk only.
E) interest rate risk, exchange rate risk, and credit risk.