Bank USA recently purchased $11.4 million worth of euro-denominated one-year CDs that pay 10 percent interest annually. The current spot rate of U.S. dollars for euros is $1.104/€1. a. Is Bank USA exposed to an appreciation or depreciation of the dollar relative to the euro? b. 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 $1.004/€1? (Round your answer to 3 decimal places. (e.g., 32.161)) c. 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 $1.204/€1? (Round your answer to 3 decimal places. (e.g., 32.161))

Respuesta :

Answer:

a. Bank USA has purchased CDs in euro. Hence on maturity of the CDs they will receive euro and have to convert Euro into USD. Bank USA will be selling Euro and buying USD on maturity of CDs. Hence appreciation of USD will make loss for the bank.

Explanation:

Please see attachment .

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