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A Detroit bank pays 6% (annual percentage rate) for a $100,000 six-month certificate of deposit, while a Windsor, Ontario (Canada) bank advertises a six-month rate of 7.5%. The exchange rates are as follows:

Exchange Rates

1 Canadian dollar (C$) can be exchanged in the spot market for US$0.8345

1 C$ can purchase US$0.8225 six months forward

a) What will a US investor’s total proceeds be in 6 months if he invests in the US CD?

b) What will the US investor’s total proceeds be in C$ if he converts the $100,000 to C$ and invests with the Windsor bank?

c) What will the investor’s US$ proceeds be from the Windsor bank investment in six months in US$ if he hedged his position when he made the investment?

d) Which investment should the investor choose?


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