Problem: You are the vice president of finance for the 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 a 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?