You are the vice president of International InfoXchange headquarted in Chicago,

Question

You are the vice president of International InfoXchange headquarted in Chicago, Illinois. All shareholder 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 $1.04 to the Canadian dollar. By the end of the month, it has unexpectedly dropped to 94 cents. Has your company made a gain or a loss as a result, and by how much?

Explanation / Answer

You took a loan of 5,000,000 canadian dollar = 5,000,000*1.04 = $ 5,200,000 US Dollar

You still owe the bank in Canadian dollars.

At the end of month your loan of 5,000,000 canadian dollars = 5,000,000*0.94 = $ 4,700,000 US dollars

So your company has made a profit of 5,200,000 - 4,700,000 = $ 500,000 US dollars

You got $5200000 & you owe back $4700000, thus you made a profit of $500000.

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