A German bank issues a one-year 2,000,000 CD at 2%. It uses these funds to make a one-year US $- denominated loan to ABC Corporation at 4%. Current exchange rate is $1.15/. The one-year forward rate (F$/) = $1.17/.

1. What is bank's exchange rate risk exposure?

A. Bank is exposed to an appreciation of the US $ relative to the Euro.

B. Bank is exposed to a deprecitaion of the Euro relative to the US$.

C. Bank is exposed to a depreciation of the US $ relative to the Euro.

D. None of the above.

2. What are the bank's loan proceeds (in $s) from the loan (i.e. how much will the German bank receive in one-year from the loan)?

A. $2,300,000

B. $2,392,000

C. $2,080,000

D. $1,808,696

3. How can the bank manager hedge the exchange rate exposure?

A. The manager can buy 2,000,000 forward at the forward rate of $1.17/.

B. The bank manager can sell 2,080,000 forward at the forward rate of $1.17/.

C. The bank anager can buy $2,392,000 forward at the forward rate of $1.17/.

D. The bank manager can sell $2,392,000 forward at the exchange rate of 1.17/.

4. Assume the bank manager does not hedge the exposure to exchange rate risk. At the end of the year, the exchange rate is $1.20/. What are the bank's net proceeds (in s) from these transactions [Hint: remember to deduct the cost of the CD].

A. + 46,667

B. - 46,667

C. - 4,444

D.+ 1,993,333

5. If the bank manager hedges its exposure using the forward contract, what are the bank's net proceeds (in s) from the transaction? [Hint: do not forget to compute the cost of the CD]. A. + 76,174

B. 0

C. + 4,444

D. - 4,444