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 on the bank's cash position if in one year both Canadian bond rates increase to 7.538 percent and the exchange rate falls to U.S.$0.765 per Canadian dollar? (Assume no change in U.S.interest rates. )

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.