Question 1: You are the Vice President of Finance for Richmond 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 Tucson to finance the acquisition of a titanium mine in Quebec province. The loan will be repaid in Canadian dollars. At the time when Richmond'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 Tucson 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?