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. What is the end-of-year profit or loss on the bank's cash position if in one year Canadian bond rates increase to 7.5 percent? Assume no change in either current U.S. interest rates or current exchange rates. (Choose the closest answer)

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