Question

Bank USA recently purchased $10.8 million worth of euro-denominated one-year CDs that pay 11 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)) a. Exposure Return if dollar appreciates Return if dollar depreciates %

Answer 1

1.
Exposed to depreciation of euro

2.
=(10.8/1.104*1.11*1.004)/(10.8)-1
=0.95%

3.
=(10.8/1.104*1.11*1.204)/(10.8)-1
=21.05%