The Figure Given Below Depicts the Foreign Exchange Market for British

question 35

Multiple Choice

The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2

-Suppose a U.S. investor buys a Canadian government bond with a face value of Canadian dollar (CAD) 100 and an annual yield of 8.8 percent. Which of the following statements is true?

• A)At maturity, the dollar return from the Canadian bond will be $108.8, regardless of what happens to the exchange rate.
• B)The Canadian bond will yield the same dollar return from the time of purchase to the time of maturity.
• C)An American will make a profit on the Canadian bond only when the CAD-denominated return is higher on the Canadian bond than the dollar-denominated return on a comparable U.S. bond.
• D)The dollar return on the Canadian bond depends on the dollar price of the Canadian dollar at the time of maturity.
• E)The decision to buy the Canadian bond should be based solely on the CAD interest return and not on changes in the exchange rate.

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