Question:
You are the Vice President of Finance for Daniel's 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 Daniel'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.
Explain how the Tucson bank could lose on this transaction assuming no hedging.