Question

Your firm has a contract to purchase 1000 laptops from a Taiwanese company. The payment is due on receipt of the shipment and must be delivered in Taiwan on June 31, 2020. In March 2020, when you are arranging the contract, the laptops are each priced at 20,000 NT$ (New Taiwan Dollar). The spot rate in March 2020 is $1 in exchange for 30 NT$.

a) [5 points] What is the U.S. dollar price of one unit of laptop in March 2020?

b) [5 points] What will be the total USD price of the laptops when payment is due in June if the exchange rate does not change between March and June?

c) [10 points] What will be the total USD price of the laptops when payment is due in June if the USD depreciates against NT$ by 10% between March and June?

Answer 1

(A)

So in this case we have to calculate the price of one unit of laptop in march 2020 in U.S. Dollar price

as it is already given in the question, that during march 2020 the laptops are each priced at 20,000 NT$ .

where The spot rate in March 2020 is $1 in exchange for 30 NT$.

so to calculate the price of laptop in US Dollar term we will use the simple mathematical equilibirium condition

cost of one laptop = 20,000 NT$

applying the equilibirium condition

cost of one laptop * US Dollar required to purchase one laptop =  20,000 NT$ ............................. (1)

we know, one US Dollar = 30 NT$. .................................... (2)

now on putting the value of equation no (2) in equation no (1)

cost of one laptop * 30 NT$ = 20,000 NT$

therefore

  

So $666.66  is the U.S. dollar price of one unit of laptop in March 2020.

(B)

Given firm has a contract to purchase 1000 laptops from a Taiwanese company

now from above part (A) solution we know that the $666.66  is the U.S. dollar price of one unit of laptop in March 2020, and it is also given that during the march and june there is no change in the exchange rate

thus the total cost of 1000 laptop in US Dollar will be calculated as follows

Total cost of 1000 laptop in US Dollar = 1000 laptop * price of laptop in US Dollar rate

Total cost of 1000 laptop in US Dollar = 1000 * 666.66 = $666660

Thus the total cost of 1000 laptop in US Dollar will be  $666660

(C)

if the USD depreciates against NT$ by 10% between March and June then in that case the amount that has to be paid to buy one laptop in US Dollar rate will increase,

now we have to calculate the price of one laptop against adjusting the new depriciated US Dollar rate

as it is already given in the question, that during march 2020 the laptops are each priced at 20,000 NT$ , and it remains same

Now The spot rate in March 2020 is $1 in exchange for 27 NT$.

Now again to calculate the price of laptop in US Dollar rate we will use the simple mathematical equilibirium condition

again we will take the same, cost of one laptop = 20,000 NT$

Now on again applying the equilibirium condition

cost of one laptop * US Dollar required to purchase one laptop =  20,000 NT$ ........................(4)

we know, depriciated one US Dollar = 27 NT$. ......................................(5)

now on putting the value of equation no (4) in equation no (5)

cost of one laptop * 27 NT$ = 20,000 NT$

therefore

So now $740.74 is the U.S. dollar price of one unit of laptop after depriciation in US Dollar rate

now thus the total cost of 1000 laptop in US Dollar will be calculated as follows

Total cost of 1000 laptop in US Dollar = 1000 laptop * price of laptop in US Dollar rate

Total cost of 1000 laptop in US Dollar = 1000 * 740.74 = $740740

Thus the total cost of 1000 laptop in US Dollar will be after depriciation in its value will be $740740

{earlier one dollar is equal to 30 NT$, and as it is given that the Dollar rate decreases by 10% thus the new relationship between the Dollar and NT$ will be as follow,1 Dollar = 30 - 30*0.10 = 27NT$}