You are the vice president of International InfoXchange, headquartered in Chicag

Question

You are the vice president of International InfoXchange, headquartered in Chicago. All shareholders of the firm live in the United States. Earlier this month, you obtained a loan of 5 million Canadian dollars from a bank in Toronto to finance the construction of a new plant in Montreal. At the time the loan was received, the exchange rate was 75 U.S. cents to the Canadian dollar. By the end of the month, it has unexpectedly dropped to 70 cents. Has your company made a gain or loss as a result, and by how much?

Explanation / Answer

Yes, my company has made gain. As the Canadian dollar has depreciated. we have to pay less amount of interest in USD for the same loan. Also, the asset will increase by $3.75 but the liability will be only $3.5 million. But the realised gain will be only the difference in interest.

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