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 both Canadian bond rates increase to 7.5 percent and the exchange rate falls to US$0.765 per Canadian dollar (Assume no change in U.S. interest rates.) (Choose the closest answer)

A) Loss of US$12,000.
B) Loss of US$75,000.
C) Profit of C$9,000.
D) Profit of US$50,000.
E) Loss of C$119,000.