You expect to liquidate your position in one year

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Reference no: EM132053369

Canadian bank issues a five-year U.S. CD at 5 percent annual interest to finance a C$1.274 million (Canadian dollar) investment in two-year, fixed rate Canadian bonds selling at par and paying 7 percent annually. You expect to liquidate your position in one year. If you wanted to hedge your bank's risk exposure, what hedge position would you take?

a. A short interest rate hedge to protect against interest rate declines and a short currency hedge to protect against increases in the value of the Canadian dollar with respect to the U.S. dollar.

b. A short interest rate hedge to protect against interest rate increases and a short currency hedge to protect against declines in the value of the Canadian dollar with respect to the U.S. dollar.

c. A long interest rate hedge to protect against interest rate increases and a long currency hedge to protect against declines in the value of the Canadian dollar with respect to the U.S. dollar.

d. A long interest rate hedge to protect against interest rate declines and a long currency hedge to protect against increases in the value of the Canadian dollar with respect to the U.S. dollar.

e. A long interest rate hedge to protect against interest rate declines and a long currency hedge to protect against decreases in the value of the Canadian dollar with respect to the U.S. dollar.

Please explain WHY

Reference no: EM132053369

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