Gates Auto Inc.manufactures automobile engines in the United States.Gates Auto Inc.sells 200 of its 8 - cylinder Hoste model engines to a company in Canada.The total price for these engines is C$60,000.Gates Auto Inc.will deliver the engines today and receive payment in 3 months from the Canadian company.When payment is received Gates Auto will convert the C$60,000 into U.S.dollars.The spot rate is $0.7865/C$ and if the spot rate in 3 months is $0.7622/C$,how much will Gates Auto Inc.gain or lose due to exchange rate movements on this transaction if it does not perform any hedges.

Question

Quizplus · Accepted Answer

Gates Auto Inc.will lose $1,458.30 on this transaction due to the movements of exchange rates.To calculate this just convert the C$60,000 into U.S.dollars today and in 3 months.Today the C$60,000 is worth $47,190 and in 3 months the C$60,000 will be worth $45,731.71.Therefore if Gates Auto Inc.remains unhedged in this transaction they will lose $1,458.29.