Financial institution issued $200 million worth of one-year CDs in Brazilian reals at a rate of 6.50 percent. The exchange rate of U.S. dollars for Brazilian reals at the time of the transaction was 1.00.
a. Is the financial institution exposed to an appreciation or depreciation of the U.S. dollar relative to the Brazillian real?
b. What will be the percentage cost to the financial institution on this CD if the dollar appreciates relative to the Brazillian real such that the exchange rate of U.S. dollars for Brazillian reals is 1.2 at the end of the year?
c. What will be the percentage cost to the financial institution on this CD if the dollar depreciates relative to the Brazillian real such that the exchange rate of U.S. dollars for Brazillian reals is 0.9 at the end of the year?