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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
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
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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 U.S. $0.78493 per Canadian dollar. What is the end-of-year profit or loss on the bank’s cash position if in one year both Canadian bond rates increase to 7.5 percent and the exchange rate falls to U.S. $0.765 per Canadian dollar? (Assume no change in U.S. interest rates.)
