You work for an Australian bank. Your bank issues a one-year CD at 5% annual interest in
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Question:
You work for an Australian bank. Your bank issues a one-year CD at 5% annual interest in Australia to finance a 200,000 Chinese bond, which has a 2-year maturity and is selling at par. It pays a fixed rate at 7% annually. You expect to liquidate your position in one year. Currently, spot exchange rates are $0.8 per Chinese Yuan.
What is the end of year profit or loss (in Australian $) on the bank's position if in one year the exchange rate falls to $0.55 per Chinese Yuan? (Assume no change in interest rates.)
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