You are the vice-president of finance for Exploratory Resources, headquartered in Calgary. In January 2012, your firm's American subsidiary obtained a six-month loan of $2.0 million (U.S.) from a bank in Calgary to finance the acquisition of an oil-producing property in Oklahoma. The loan will also be repaid in U.S. dollars. At the time of the loan, the spot exchange rate was US$1.0135/C$ and the U.S. currency was selling at a premium in the forward market. The June 2012 futures contract (face value = $200,000 per contract) was quoted at US$1.0117. a. This part of the question is not part of your Connect assignment. b. How much is the bank expected to lose/gain due to foreign exchange risk? (Round the intermediate calculation to 4 decimal places.)

You are the vice-president of finance for Exploratory Resources, headquartered in Calgary. In January 2012, your firm's American subsidiary obtained a six-month loan of $2.0 million (U.S.) from a bank in Calgary to finance the acquisition of an oil-producing property in Oklahoma. The loan will also be repaid in U.S. dollars. At the time of the loan, the spot exchange rate was US$1.0135/C$ and the U.S. currency was selling at a premium in the forward market. The June 2012 futures contract (face value = $200,000 per contract) was quoted at US$1.0117. a. This part of the question is not part of your Connect assignment. b. How much is the bank expected to lose/gain due to foreign exchange risk? (Round the intermediate calculation to 4 decimal places.)

SWFT Corp Partner Estates Trusts

42nd Edition

ISBN:9780357161548

Author:Raabe

Publisher:Raabe

Chapter9: Taxation Of International Transactions

Section: Chapter Questions

Problem 27P

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North Bank has been borrowing in the U.S. markets and lending abroad, thus incurring foreign exchange risk. In a recent transaction, it issued a one-year $2 million CD at 6 percent and funded a loan in euros at 8 percent. The spot rate for the euro was €1.45/$ at the time of the transaction (US being the home country). a. Information received immediately after the transaction closing indicated that the euro will depreciate to €1.47/$ by year-end. If the information is correct, what will be the realized spread on the loan? What should have been the bank interest rate on the loan to maintain the 2 percent spread? Assume adjustments in principal value are included in the spread. b. The bank had an opportunity to sell one-year forward marks at €1.46. What would have been the spread on the loan if the bank had hedged forward its foreign exchange exposure? c. What is interest rate parity theory and calculate that at what forward exchange rate of dollars per euro, an investor in USA would…
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