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A Canada-based bank reports its financials in Canadian Dollars (C$). At the beginning of year, the bank has the following assets and liabilities:

Assets	Liabilities
C$500 Canadian loans (made in C$)	C$700 Canadian CDs (in C$)
C$200 equivalent U.S. loans (made in US$)

Assume the following conditions:

• the beginning-of-year spot exchange rate is US$0.8/C$;
• the Canadian loans will last for one year, are default-free, and have an interest rate of 6%;
• the U.S. loans will also last for one year, are default-free, and have an interest rate of 5%;
• the Canadian CDs will last for one year and have an interest rate of 3%.

1. (4 pts) In this part, assume the bank does not hedge against foreign exchange risk. Make up the year-end exchange rate, under which the bank will realize a lower profit from its U.S. loans. Hint: the U.S. loans would have made the bank C$200*5% = C$10 in profits if exchange rate stayed unchanged at US$0.8/C$. You goal is to come up with a different year-end exchange rate, which would lower the profit to less than C$10. Make sure to show your work. Focus on the U.S. loans only - you don't have to work on the Canadian loans and the Canadian CDs.

2. (1 pt) Show how on-balance-sheet hedging can be down. You can either write in narratives or draw a new balance sheet. You don't have to show math/calculation on how the hedging works.

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