Suppose that on September 15, 2001, a GM's financial officer hedges a CAD 10 million cash outflow three months in the future (this is 50% of a CAD 20 million notional exposure), with a forward contract. The spot exchange rate on the date of the transaction is 1.5621 and the forward rate is 1.5667: GM will buy 10 million CAD in 3 months at this rate. Will this transaction generate a gain or a loss for GM if the spot exchange rate CAD/USD in 3 month is 1.5898 (depreciation of 1.77% of the CAD)?

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Ans To determine whether this transaction generates a gain or a loss for GM we need to compare the a... View the full answer