QUESTION 4

A U.S. bank issues a 1-year, $1 million U.S. CD at 5 percent annual interest to finance a C $1.274 million investment in 2-year fixed-rate Canadian bonds selling at par and paying 7 percent annually. You expect to liquidate your position in 1 year upon maturity of the CD. Spot exchange rates are US $0.78493 per Canadian dollar. What is the end-of-year profit or loss on the bank's cash position if in one year the exchange rate falls to US $0.765/C $1? Assume there is no change in interest rates. (Choose the closest answer)

		Loss of US $75,000.
		Profit of C $274,000.
		Loss of US $7,000.
		Profit of C $9,000.
		Loss of US $5,000.