City Bank issued $200 million of one-year CDs in the United States at a rate of 6.50 percent. It invested part of this money, $100 million, in the purchase of a one-year bond issued by a U.S. firm at an annual rate of 7 percent. The remaining $100 million was invested in a one-year Brazilian government bond paying an annual interest rate of 8 percent. The exchange rate at the time of the transactions was Brazilian real 1/$.

a. What will be the net return on this $200 million investment in bonds if the exchange rate between the Brazilian real and the U.S. dollar remains the same?

b. What will be the net return on this $200 million investment if the exchange rate changes to real 1.20/$?

c. What will the net return on this $200 million investment be if the exchange rate changes to real 0.80/$? LO.1