Adjusting returns for exchange rates

Reference no: EM1345675

You're vice president of finance for International Resources, Inc. headquartered in Denver, Colorado. In January 2007, your firm's Canadian subsidiary obtained a six-month loan of $100,000 Canadian dollars from bank in Denver to finance the acquisition of a titanium mine in Quebec province. The loan will also be repaid in Canadian dollas. At the time of the loan, the spot exchange rate was $0.8852/Canadian dollar and the Canadian currency was selling at a discount in the forward market. The June 2007 futures contract was quoted at US $0.8817.

a. Explain how the Denver bank could lose on this transaction if it does not hedge.

b. If the bank does hedge, what is the maximum amount it can lose?

Reference no: EM1345675

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