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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

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

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

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

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

  • None of the above.

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