Bank USA recently purchased $ 10 million worth of euro-denominated one- year CDs that pay 10 percent interest annually. The current spot rate of U.S. dollars for euros is $ 1.30/€ 1.
a. Is Bank USA exposed to an appreciation or depreciation of the dollar relative to the euro?
b. What will be the return on the one- year CD if the dollar appreciates relative to the euro such that the spot rate of U.S. dollars for euros at the end of the year is $ 1.20/€ 1?
c. What will be the return on the one-year CD if the dollar depreciates relative to the euro such that the spot rate of U.S. dollars for euros at the end of the year is $ 1.40/€ 1?