A USBank 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.You expect to liquidate your position in 1 year upon maturity of the CD.Spot exchange rates are U.S.$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 U.S.$0.765 per Canadian dollar? (Assume no change in U.S.interest rates. ) (Choose the closest answer)

A) Loss of U.S.$12,000.
B) Loss of U.S.$75,000.
C) Profit of C $9,000.
D) Profit of U.S.$50,000.