Question

Ford purchased electric motors from Nidec (Japanese company) and was billed ¥200 million payable in three months. Two companies agree to share the currency risks. In the Price Adjustment Clause, the neutral zone is ¥115.38/$ - ¥129.42/$, the base rate is ¥122.4/$ and both parties will share the currency risk beyond a neutral zone.

How much each party have to pay/receive if the exchange rate is ¥111.42/$

a.            Ford pays ¥200 million; Nidec receives $1.634 million.

b.            Ford pays $1.634 million; Nidec receives ¥200 million.

c.            Ford pays $1.764 million; Nidec received ¥196.55 million.

How much each party have to pay/receive if the exchange rate is ¥132.12/$

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

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

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

Answer 1

Billed Value (Yen Million) = 200

Neutral zone (Yen / USD) = 115.38-129.42. This indicates that if the exchange rate is above 129.42 or below 115.38, such exchange rise will be shared equally.

Base rate = 122.4

a. If the exchange rate yen 111.42 per USD:

Exchange rate of 111.42 is beyond the neutral zone of 115.38. Thus the lower exchange will be shared equally.

Lower exchange = 115.38-111.42 = 3.96

Each party will bear equally = 3.96 / 2 = 1.98

Thus, the net exchange rate will be 111.42 + 1.98 = Yen 113.40/USD.

Thus, for Yen 200 Million, Ford will pay = 200 Million / 113.40 = $1.764 Million

and Nidec will receive $1.764 Million * 111.42 = Yen 196.55 Million.

Option is C Ford pays $1.764 million; Nidec received ¥196.55 million.

b. If the exchange rate yen 132.12 per USD:

Exchange rate of 132.12 is beyond the neutral zone of 129.42. Thus the higher exchange will be shared equally.

Higher exchange = 132.12-129.42 = 2.7

Each party will bear equally = 2.7 / 2 = 1.35

Thus, the net exchange rate will be 132.12 - 1.35 = Yen 130.77/USD.

Thus, for Yen 200 Million, Ford will pay = 200 Million / 130.77 = $1.529 Million

and Nidec will receive $1.529 Million * 132.12 = Yen 202.01 Million.

Option is B Ford pays $1.529 million; Nidec received ¥202.01 million.