Question

Transaction exposure.   International​ Products, Inc. has ordered 20,000 leather coats from Argentina for delivery in 3 months. The contracted cost of a coat is 148 pesos. International Products will pay for the coats upon delivery. The current indirect exchange rate is​ $1 for 1.2381 pesos. The anticipated inflation rate is 4.3​% in the United States and 6.9% in Argentina. In U.S.​ dollars, how much will the 20,000 leather coats cost International Products at​ delivery?

1)In U.S.​ dollars, how much will the 20,000 leather coats cost International Products at​ delivery?

Answer 1

Inflation rate in US for 3 months =4.3 *3/12 = 1.075%

For Argentina : 6.9 * 3/12 = 1.725%

Expected rate in 3 months: current spot rate : spot rate (1+iA)/(1+iUS)

                   = 1.2381 (1+.01725)/(1+.01075)

                  = 1.2381 *1.01725/1.01075

                   Pesos 1.24606 per $

Expected payment in pesos = 20000*148 = 2960000 pesos

Expected payment at delivery = Expected payment in pesos / Expected rate in 3 months

                 = 2960000 / 1.24606

              = $ 2,375,487.54