A U.S. bank issues a 1-year, $1 million U.S. CD at 5 percent annual interest to finance a C $1.274 million investment in 2-year fixed-rate Canadian bonds selling at par and paying 7 percent annually. You expect to liquidate your position in 1 year upon maturity of the CD. Spot exchange rates are US $0.78493 per Canadian dollar.

If in one year there is no change in either interest rates or exchange rates, what is the end-of-year profit or loss of your bank's cash position? Assume that annual interest is paid on both the CD and the Canadian bonds on the date of liquidation in exactly one year.

		Profit of US $20,000.
		Loss of C $224,000
		Profit of US $50,000.
		Profit of C $63,000.
		Profit of US $313,000.

Answer rating: 100% (QA)

C 12874 million if inivested for 1 year in Canadian Bonds at 7 r... View the full answer