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Question
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 US $0.765 per Canadian dollar (Assume no change in U.S. interest rates.) (Choose the closest answer)
A. Loss of US $12,000.
B. Loss of US $75,000.
C. Profit of C $9,000.
D. Profit of US $50,000.
E. Loss of C $119,000.
If one-year Canadian bond rates increase 50 basis points, the liquidated value of the 2-year bond will decrease.
If exchange rates fall, the repatriated amount:
Profit = {[(C $1,268,074 + (1,274,000 × 0.07))] × (US $0.765/C $1)} - (US $1,000,000 × 1.05)
Profit = [(C $1,268,074 + 89,180)] × (US $0.765/C $1) - US $1,050,000
Profit = US $1,038,300 - US $1,050,000 ≈≈ $11,700
Answer
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