Bank USA recently purchased $10 million worth of euro-denominated one-year CDs that pay 10% interest annually. The current spot rate of U.S. dollars for euros is $1.30/€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 $1.20/€1?
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 $1.40/€1?