Question

The Greenbay Motor Company ordered six German-built engines at $15,000 each when the direct exchange rate was $1.2500 per euro and elected not to cover the obligation with a forward contract. When the bill was due three months later, the rate was $1.1500. Greenbay's marginal tax rate is 40%.

a. How much was the exchange rate gain or loss on the deal?

b. What kind of exchange rate gain or loss was it?

c. What was the tax impact?

Answer 1

a.)	Initial Liability in euro	72,000	( 15,000 x 6 x 1/1.25 )
	Liability on due date in euro	78,261	( 15,000 x 6 x 1/1.15 )
	Exhange rate loss in euro	6,261	( 78,261 - 72,000 )
b.)	It was realized Currency exchange rate loss.
c.)	Tax saving on currency exchange loss in euro	2,504	( 6,261 x 40% )