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. If in one year there is no change in either interest rates or exchange rates, what is the end-of-year profit or loss of the U.S. bank's cash position? Assume that annual interest is paid on both the CD and the Canadian bonds on the date of liquidation in exactly one year.

A) Profit of US$20,000.
B) Loss of C$224,000
C) Profit of US$50,000.
D) Profit of C$63,000.
E) Profit of US$313,000.