The current spot rate is $1.06/€ and the price you pay for your European imports is...

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

Solutions

Expert Solution

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.

jeff jeffy answered 1 year ago

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