Question

In: Finance

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

A U.S. importer has agreed to purchase 500 bottles of cachaça (a type of rum) from Brazil at a price of 75 BRL (Brazilian reals) each. The cachaça will take five months to bottle, label, and ship, and payment is due before the wine is shipped.

  1. 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.
  1. (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?
  1. (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 4 weeks ago
Next > < Previous

Related Solutions

A U.S. importer has agreed to purchase 500 bottles of cachaça (a type of rum) from...
A U.S. importer has agreed to purchase 500 bottles of cachaça (a type of rum) from Brazil at a price of 75 BRL (Brazilian reals) each. The cachaça will take five months to bottle, label, and ship, and payment is due before the wine is shipped. (5 pts)Assume the spot rate is 3.756 BRL is equal to 1 USD. What is the total price in USD to the importer if the spot rate remains unchanged? (5 pts)What is the cost...
1) A U.S. importer has agreed to purchase 500 bottles of cachaça (a type of rum)...
1) A U.S. importer has agreed to purchase 500 bottles of cachaça (a type of rum) from Brazil at a price of 75 BRL (Brazilian reals) each. The cachaça will take five months to bottle, label, and ship, and payment is due before the rum is shipped. Assume the current spot rate is 3.756 BRL is equal to 1 USD. What is the price in USD to the importer if the spot rate remains unchanged? A. $140,850.00 B. $125.243.50 C....
3. A U.S. importer has to make a euro500,000 payment to an Italian exporter in 60...
3. A U.S. importer has to make a euro500,000 payment to an Italian exporter in 60 days. They decide to purchase a European call option on euros with the following details: • Contract size: euro250,000 • Exercise price: $1.45/euro • Call option premium: $0.04 per euro What is the overall profit/loss given the following future spot rates? Should the importer exercise the option in each scenario? A) $1.40/euro B) $1.45/euro C) $1.49/euro D) $1.52/euro
Alcoa, a U.S. firm, has signed a contract to purchase goods from a manufacturer in Germany...
Alcoa, a U.S. firm, has signed a contract to purchase goods from a manufacturer in Germany for €5,000,000. The purchase was made in June with payment due six months later in December. The following market quotes are available: o The spot exchange rate is $1.20/€ o The six month forward rate is $1.21/€ o The Euro zone 6-month borrowing rate is 7% o The Euro zone 6-month deposit rate is 5% o The U.S. 6-month borrowing rate is 6% o...
Jess has agreed to purchase a house on 11th Street by July 2020 but only if...
Jess has agreed to purchase a house on 11th Street by July 2020 but only if she is able to sell her house on 15th Street by June 2020. This term is called a: express condition concurrent condition condition subsequent anticipatory condition --------------------------------------------------------------------------------------------------- In the United States, sources of law include: Executive orders laws passed by a state legislature international common law the U.S. Constitution --------------------------------------------------------------------------------------------------- The main purpose of contract remedies is to put the party who is not...
1. A purchaser has agreed to purchase the shares of a qualified small business corporation. Which...
1. A purchaser has agreed to purchase the shares of a qualified small business corporation. Which of the following is notapplicable? Select one: a. The purchaser may try to discount the value of the shares if a future sale of the assets may result in a tax liability. b. The sale will result in the immediate taxation of the corporation, and the after-tax proceeds will be paid to the seller. c. The purchaser will assume the corporation's current UCC values....
Jenkins agreed to purchase goods from Smith, F.O.B. Smith’s plant. The goods in Smith’s plant are...
Jenkins agreed to purchase goods from Smith, F.O.B. Smith’s plant. The goods in Smith’s plant are separated and stenciled with Jenkins’ name. Jenkins then telephones Smith and repudiates. The goods are subsequently destroyed by fire. Assume that Smith had no insurance on the goods. If Smith sues Jenkins for the purchase price, what is the result? Use UCC provisions to support your answer/analysis. Cite the specific sections of the UCC that support your argument.
(A) Modern Ltd has decided to lease a plant from a supplier and has agreed the...
(A) Modern Ltd has decided to lease a plant from a supplier and has agreed the following terms with the supplier: Date of inception of lease: 1 July 2019 Duration of lease: 10 years Life of leased asset: 10 years Unguaranteed residual value: $15,000 Lease payments: 10,000 at lease inception and $12,000 on 30 June each year for the next 10 years. Fair value of leased plant at date of lease inception: $97,469 i. Determine the interest rate implicit in...
An Australian importer has received goods from India and will pay 2 million Indian rupees (INR)...
An Australian importer has received goods from India and will pay 2 million Indian rupees (INR) in one year. The importer expects that the value of the INR will appreciate by 20.57% against the Australian dollar from today’s spot rate of 0.2527 in one year. How much Australian dollar the importer will make a loss due to appreciation of INR after one year? (enter the whole number with no sign or symbol)
Suppose that 15% of the U.S. population has some type of learning disorder a) Consider a...
Suppose that 15% of the U.S. population has some type of learning disorder a) Consider a simple random sample of size 300. Check that the conditions for the sample proportion to be approximately normal are met. What is the probability that the proportion of people in the sample with a learning disorder is at least 0.12? (b) How would you compute the probability that at least 36 members of a simple random sample of size 300 chosen from the U.S....
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT