Your USBank Issues a One-Year U

Multiple Choice

Your U.S.bank issues a one-year U.S.CD at 5 percent annual interest to finance a C $1.274 million (Canadian dollar) investment in two-year,fixed rate Canadian bonds selling at par and paying 7 percent annually.You expect to liquidate your position in one year.Currently,spot exchange rates are U.S.$0.78493 per Canadian dollar.

What is the end-of-year profit or loss to the bank if in one year the exchange rate falls to U.S.$0.765 per Canadian dollar? (Assume that there is no change in interest rates. )

A) Loss of U.S.$75,000.
B) Profit of C $274,000.
C) Loss of U.S.$7,000.
D) Profit of C $9,000.