Bank USA recently purchased $10 million worth of eurodenominated one-year CDs that pay 10 percent interest annually. The current spot rate of U.S. dollars for euros is

$1.104/€1. (LG 9-5)

a. Is Bank USA exposed to an appreciation or depreciation of the dollar relative to the euro?

b. What will be the return on the one-year CD if the dollar appreciates relative to the euro such that the spot rate of U.S. dollars for euros at the end of the year is $1.004/€1?

c. What will be the return on the one-year CD if the dollar depreciates relative to the euro such that the spot rate of U.S. dollars for euros at the end of the year is $1.204/€1?

AppendixLO1