Context to Develop Our Reasoning:

Here let us assume that an American manufacturer wishes to export his product (baseball bats) to a European country. The question that we are asking is: Should the American Exporter Quote for/Invoice the product in Dollars or should he quote in Euros.

The current exchange rate is 1 $ = 0.85 Euros, which implies that 1 Euro = 1.176 Dollars

Now let us make a very normal assumption: The European buyer (being no fool) is very aware of manufacturing costs in USA so in any current negotiations he uses the current manufacturing costs as his base for arriving at a price: He therefore agrees to pay $ 7 for a single bat. Alternatively, he would be ready to pay Euros 5.95 using current exchange rates. The contract is for the sale of 1000 bats by the American exporter. The quoted price per bat can be $7 or Euro 5.95, depending on the currency you choose to transact in.

The contract will take 3 months to execute (it is very normal for international contacts to take time), and by the time the European recipient will receive the bats, 3 months would pass. In these three months, the exchange rate would (quite naturally) change:

Consider

The dollar depreciates and after three months 1 $ = 0.50 Euro

If the quotation is in Euros, the American exporter will receive payments in Euros in his own American bank, in keeping with the quotation. The bank will then convert the Euros to Dollars at the prevailing exchange rate at that time. Ultimately the American exporter wants dollars since he wishes to spend money in USA.

If the payment and correspond

1. calculate and show, what the American exporter gains by quoting in the Euro.