1. Suppose you are a distributor of Porsche's in Atlanta. In anticipation of increased demand in the summer, you placed an order on Feb 1 for 10 Porsche Cayenne's to be delivered on May 1. Payment will be made on delivery of 500,000 Euros for 10 cars. Suppose the spot exchange rate on Feb 1 = S($/) = 1.2. Suppose the market price of a Porsche Cayenne is $40,000 in the US. The market sets the price not your dealership, so you cannot increase the price.

(a) Suppose now the USD depreciates to S($/)= 1.5$/ on May 1. If you use the spot exchange rate on May 1 to pay the German supplier, how much will you have to pay for each car in USD($)? Do you make a profit or loss on the cars? With hindsight and the information given here, should you have waited to buy Euros until May 1, or should you have bought them on February 1?

(b) Suppose now the USD appreciates to S($/)= 1.1$/ on May 1. If you use the spot exchange rate on May 1 to pay the German supplier, how much will you have to pay for each car in USD($)? Do you make a profit or loss on the cars? With hindsight and the information given here, should you have waited to buy Euros until May 1, or should you have bought them on February 1?