A U.S. importer has agreed to purchase 500 bottles of cachaça (a type of rum) from...

2 pts)What can the importer do to reduce the risk of a currency rate change between the time he signs the contract to buy the cachaça and when he is required to pay for it?
1. Offer to pay in a universal currency like Euros.
2. There is nothing the importer can do but hope for the best.
3. Purchase a forward contract for the purchase amount at an acceptable exchange rate.
4. Refuse to purchase the goods if the dollar strengthens.

(5 pts)Suppose the importer buys a forward contract for 37,500 BRL at a rate of 3.7 What is the importers profit and profit margin if the spot rate is 3.46 BRL to 1 USD on the payment date?

(5 pts)Suppose the importer buys a forward contract for 37,500 BRL at a rate of 72. What is the importers profit and profit margin if the spot rate is 3.86 BRL to 1 USD on the payment date?

Solutions

Expert Solution

Answer to part 1

C. Purchase a forward contract for the purchase amount at an acceptable exchange rate is the correct answer because purchasing a forward contract will reduce the risk of the importer that if the USD weakens as compared to BRL in future then the importer will be safe against all such fluctuations as he has already purchased a future contract.

Answer to part 2

If the importer buys a forward contract for 37,500 BRL at a rate of 3.7

Importer will pay = 37500/3.7 = USD 10,135.135

If he had not purchased future, he would have paid = 37500/3.46 = USD 10,838.150

So, the profit because of buying future will be 10,838.150 - 10,135.135 = USD 703.015

Answer to part 3

If the importer buys a forward contract for 37,500 BRL at a rate of 72.

Importer will pay = 37500/72 = USD 520.833

If he had not purchased future, he would have paid = 37500/3.86 = USD 9,715.025

So, the loss because of buying future will be 9,715.025 - 520.833 = USD 9,194.192

NOTE:- Exchange rate of 72 is uncomparabel and seems to be a typing mistake. The question has been solved presuming it to be correct as there was no other information provided.

jeff jeffy answered 10 hours ago

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