You are the vice president of finance for Exploratory Resources, headquartered in Houston, Texas. In January 2010,

Question:

You are the vice president of finance for Exploratory Resources, headquartered in Houston, Texas. In January 2010, your firm’s Canadian subsidiary obtained a six-month loan of 150,000 Canadian dollars from a bank in Houston to finance the acquisition of a titanium mine in the province of Quebec. The loan will also be repaid in Canadian dollars. At the time of the loan, the spot was U.S. $.8995/Canadian dollar and the Canadian currency was selling at a discount in the forward market. The June 2010 contract (Face value = C$150,000 per contract) was quoted at U.S. $0.8930/Canadian dollar.
a. Explain how the Houston 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?

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...