An Australian bank issues a one-year Australian Certificate of Deposit at 5.5 percent annual interest to finance

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Question:

An Australian bank issues a one-year Australian Certificate of Deposit at 5.5 percent annual interest to finance a USD 3.5 million dollar investment in ten-year, fixed rate US Government bonds selling at par and paying 8 percent annually. You expect to liquidate your position in one year. Currently, spot exchange rates are 1.45 Australian Dollars per US dollar. Your position is exposed to:

A. interest rate risk, foreign exchange risk and credit risk.

B. credit risk only.

C. foreign exchange risk only.

D. interest rate risk only.

E. interest rate and foreign exchange risk and liquidity risk.