Question

Suppose that Boeing (US company) sold airplane to Lufthansa (German company) on credit and invoiced €20 million payable in six months. Two companies agree to share the currency risks. In the Price Adjustment Clause, the neutral zone is $1.14/€ - $1.26/€, the base rate is $1.2/€; and both parties will share the currency risk beyond a neutral zone. How much each party have to pay/receive if:

A) How much each party have to pay/receive if the exchange rate is $1.08/€

a.   Boeing receives $21.6 million; Lufthansa pays €20 million.

b.   Boeing receives $23.4 million; Lufthansa pays €21.67 million.

c.   Boeing receives $24 million; Lufthansa pays €20 million.

d.   Boeing receives $22.2 million; Lufthansa pays €20.56 million.

B) How much each party have to pay/receive if the exchange rate is $1.32/€
a.   Boeing receives $24 million; Lufthansa pays €18.18 million.

b.   Boeing receives $24.6 million; Lufthansa pays €18.64 million.

c.   Boeing receives $26.4 million; Lufthansa pays €20 million.

d.   Boeing receives $25.8 million; Lufthansa pays €19.55 million.

a.   Ford pay ¥202.01 million; Nidec receives $1.529 million.

b.   Ford pays $1.529 million; Nidec received ¥202.01 million.

c.   Ford pay ¥213.51 million; Nidec receives $1.616 million.

d.   Ford pay $1.616 million; Nidec receives ¥213.51 million.

Answer 1

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Answer

A)

Given that Base rate = $1.2/€

But exchange rate = $1.08/€

Difference from base = 1.20 - 1.08 = $0.12/€

Hence each part's share = Difference / 2 = 0.12 / 2 = $0.06/€

Effective rate = 1.08 + 0.06 = 1.14

Hence Payment by Lufthansa = €20 mn / 1.08 x 1.14 = € 21.67 and the payment received by Boeing = € 21.67 x 1.08 = $ 23.40

B)

Transaction cost €	20,000,000
Actual Exchange rate	$1.32/ €
Actual Transaction cost $	26,400,000
Base rate Transaction cost $	24,000,000
Difference in transaction cost $	2,400,000

Share of Lufthansa in cost sharing $	2,400,000
Share of Lufthansa in cost sharing €	1,818,181.82
Effective purchase price for Lufthansa €	18,181,818.18
Effective selling price for Boeing $	24,000,000

Hence Option A