Question

Example: Starbucks buys coffee from an Indonesian farmer for USD 50 K who in return acquires fertilizer from a US manufacturer

US Current Account (CA):

Trade: -50 K (import of coffee)

Trade: +50 K (export of fertilizer)

1. Alaska Airlines purchases its first Embraer jet from Embraer in Brazil for USD 65M. Embraer uses the receipt of USD 65M to reduce its outstanding USD loan with Bank of America in New York.

2. A Washington State farmer sells apples to a Canadian supermarket chain. The farmer is paid CAD 15M, which the farmer keeps in CAD in her bank account with a Canadian. Assume the spot exchange rate is 0.80 CAD/USD. Express your answer in USD at the current exchange rate.

Answer 1

The spot exchange rate is the rate at which a foreign currency is converted into home currency. It is the rate at which two currencies are converted. The spot exchange rate is defined in terms of foreign currency to home currency and vice-versa.

The formula for spot conversion is:

Amount of conversion multiplied by foreign currency divided by Home currency, to get the amount in terms of foreign currency i.e.:

Amount * Foreign Currency Rate / Home Currency Rate.

And to get the amount in terms of home currency, the formula will be:

Amount * Home Currency Rate / Foreign Currency Rate.

In our example, the value of the Canadian Dollar, CAD is 0.80 per 1 dollar.

So the value of CAD 15 million will be,

15,000,000 * USD / CAD = 15,000,000 * 1 / 0.80 = 18,750,000 USD or 18.75 Million US dollars.

The current conversion rate of CAD to USD is 1/0.75.

So if we convert the amount according to the current exchange rate, it will be:

15,000,000 * 0.75 / 1 = 11,250,000 USD or 11.25 Million US dollars (Approx).

Answer: The farmer will get 18.75 Million USD if the exchange rate is 0.80 CAD/USD.