Question

jasper Corp. converts $1,000,000 into euros when the exchange rate is $1 = €0.75. After three months, the company converts this back into dollars when the exchange rate is $1 = €0.80. What is the outcome of this transaction?

Answer 1

Answer:

net loss of $62,500

Explanation:

Today Jasper converted $1,000,000 into 750,000€ ($1 = €0.75)

In three months from now, Jasper turned the 750,000€ into $937,500 ($1 = €0.80). ⇒ 750,000 / 0.80 = 937,500

The result of these transactions is a net loss = $937,500 - $1,000,000 = -$62,500.

The net loss happened because the euro depreciated against the US dollar, i.e. it lost value.