Explanation:

Compute the ending value of each investment and compare it with the cost of funding.

1) U.S. bond investment

100.0 \times 1.04 = 104.0 \text{ million USD}

2) Brazilian bond investment

Convert $100.0 million to BRL at 3.5 BRL per USD:

100.0 \times 3.5 = 350.0 \text{ million BRL}

Grow at 5%:

350.0 \times 1.05 = 367.5 \text{ million BRL}

Convert back at 3.0 BRL per USD:

367.5 / 3.0 = 122.5 \text{ million USD}

3) Total asset value at maturity

104.0 + 122.5 = 226.5 \text{ million USD}

4) Repay CDs

200.0 \times 1.035 = 207.0 \text{ million USD}

5) Net profit and return

226.5 - 207.0 = 19.5 \text{ million USD}

\text{Net return} = \frac{19.5}{200.0} = 9.75\%

So the correct answer is +9.750%.

Question 501.3. City Bank issued `$200.0` million of one-year CDs in the United States at a rate of 3.50%. It invested part of this money, `$100.0` million, in the purchase of a one-year bond issued by a U.S. firm at an annual rate of 4.0%. The remaining `$100.0` million was invested in a one-year Brazilian government bond paying an annual interest rate of 5.0%. The exchange rate at the time of the transaction was USD/BRL R`$3.50`00. If the Brazilian real appreciates (against the dollar) from R`$3.50`00 to R`$3.00`00, what is the net return on this `$200.0` million investment? (Note: variation on Saunders’ Question #10).

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Last updated: May 6, 2026 at 14:02

+3.470%

0.0%

+5.833%

0.0%

+9.750%

100.0%

+12.930%

Financial Risk Manager Part 1