A U.S. bank issues a 1-year, $1 million U.S. CD at 5 percent annual interest to finance a C $1.3 million investment in 2-year fixed-rate Canadian bonds selling at par and paying 5 percent annually. The bank expects to liquidate this position in 1 year upon maturity of the CD. Spot exchange rate is U.S. $0.769 per Canadian dollar. If you wanted to hedge your bank's risk exposure, what hedge position would you take?

Select one:

a.

A long interest rate hedge to protect against interest rate declines and a short currency hedge to protect against increases in the value of the Canadian dollar with respect to the U.S. dollar.

b.

A short interest rate hedge to protect against interest rate declines and a short currency hedge to protect against increases in the value of the Canadian dollar with respect to the U.S. dollar.

c.

A long interest rate hedge to protect against interest rate increases and a long currency hedge to protect against declines in the value of the Canadian dollar with respect to the U.S. dollar.

d.

A long interest rate hedge to protect against interest rate declines and a long currency hedge to protect against increases in the value of the Canadian dollar with respect to the U.S. dollar.

e.

None of the above