In: Finance
The current spot rate is $1.06/€ and the price you pay for your
European imports is €8
million. How would the European firm “share” the FX risk with you
if they decided to
use two currencies on your invoices? How much will you pay if the
spot rate ends up at
1.08/€?
a. Bill $4 million and €3.77 million. You will pay $7.47
million.
b. Bill $4 million and €4.24 million. You will pay $8.32
million.
c. Bill $4.24 million and €4 million. You will pay $8.32
million.
d. Bill $4.24 million and €3.77 million. You will pay $8.07
million.
e. None of the above.
Please give me the details of the answer. Thanks
Current spot rate | ||||||||||
€1 = $1.06. | ||||||||||
Value of imports € 8000000 | ||||||||||
Share the FX risk. € value is more than $, So half invoice value will be € 4000000. And half shall be equivalent to current dollar amount of Euro. | ||||||||||
So, dollar amount shall be | ||||||||||
€ 40,00,000 | = 1.06 * 4000000 = | 4240000 | ||||||||
So, Total payment shall be $424000 as agreed at time of imports and €4000000. |
||||||||||
Spot rate at time of payment | ||||||||||
€1 = $1.08 | ||||||||||
€ 40,00,000 | = 1.08 * 4000000 = | 4320000 | ||||||||
Total cost = 424000(as agreed to be in dollars) + 4320000 (by converting in Euro) | ||||||||||
8560000 | ||||||||||
So, Answer is (e ) None of above | ||||||||||
Bill$ 4.24 million and €4 million and you will pay $ 8.56 million. |