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Question Three: [20 marks] Bank of America (BOA) recently purchased $100 million worth of euro-denominated one-year CDs that pay 12 percent interest annually. The current
Question Three: [20 marks] Bank of America (BOA) recently purchased $100 million worth of euro-denominated one-year CDs that pay 12 percent interest annually. The current spot rate of U.S. dollars for euros is $1.25/1. 1) Is BOA exposed to an appreciation or depreciation of the dollar relative to the euro? [3 marks) 2) 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 $1.10/1? [6 marks] 3) 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 $1.40/1? [6 marks) 4) Based on your analysis of b. and c., what are the potential benefit and limitation if BOA uses forward contract to manage its dollar against euro risk? (5 marks]
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