Question

DeMagistris Fashion Company, based in New York City, imports leather coats from Acuna Leather Goods, a reliable and long time supplier based in Buenos Aires, Argentina. Payment is in Argentine pesos, with a current exchange rate of Ps4.0/$. The outlook is for a decline in the peso's value. Since both DeMagistris and Acuna want to continue their longtime relationship, they agree on a risk sharing relationship. As long as the spot rate on the date of an invoice is between Ps3.5/$ and Ps4.5/$, DeMagistris will pay based on the spot rate. If the exchange rate falls outside this range, DeMagistris will share the difference equally with Acuna. The risk-sharing agreement will last for six months, at which time the exchange rate limits will be reevaluated. DeMagistris contracts to import leather coats from Acuna for Ps8,000,000 or $2,000,000 at the current spot rate of Ps4.0/$ during the next six months.

(1) By Thursday:

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Assume the exchange rate is Ps6.00/$ (dollar buys more pesos) and DeMagistras Fashion Company owes Ps8,000,000 to Acuna Leather.

1. What will be price of the leather coat imports in dollars to DeMagistris?

2. What will be the price of leather coat exports in pesos to Acuna?

3. Did DeMagistris pay more or less with the risk sharing than it would have without it?

Answer 1