Purchase Solution

how a bank could lose on a transaction

Not what you're looking for?

Ask Custom Question

Please include in your response, the formulas for this problem, along with a detailed explanation of how it is solved, and your rationale for reaching your conclusions.

You are the Vice President of Finance for Daniel's Resources, headquartered in Phoenix, Arizona. In January 2002, your firm's Canadian subsidiary obtained a 6-month loan of 100,000 Canadian dollars from a bank in Tuscon, to finance the acquisition of a titanium mine in Quebec province. The loan will be repaid in Canadian dollars. At the time when Daniel's Resources obtained the loan, the spot exchange rate was USD $0.6580/$1 Canadian dollar and the currency was selling at a discount in the forward market. The June 2002 contract (face value = $100,000 USD per contract) was quoted at USD $0.6520/$1 Canadian dollar.

A) Explain how the Tuscon bank could lose on this transaction assuming no hedging.

B) If the bank does hedge with the forward contract, what is the maximum amount it can lose?

Purchase this Solution

Solution Summary

This job argues how a bank could lose on a transaction.

Solution Preview

The key statement in the question is that "The loan will be repaid in Canadian dollars.". This statement exposes the bank to risks associated with fluctuations in the foreign exchange market. Consider this scenario: the Canadian dollar (CAD) depreciates vs. United States ...

Purchase this Solution

Free BrainMass Quizzes
Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.