Question
DeMagistris Fashion Company, based in New York City, imports leather coats from Acua Leather Goods, a reliable and longtime supplier, based in Kuala Lumpur, Malaysia.
DeMagistris Fashion Company, based in New York City, imports leather coats from Acua Leather Goods, a reliable and longtime supplier, based in Kuala Lumpur, Malaysia. Payment is in Malaysian Ringgit (RM). When the Malaysian Ringgit gain its parity with the U.S. dollar in January 2017 it gained in value to RM 4.0/$ by October 2002. The outlook was for a further decline in the pesos value. Since both DeMagistris and Acua wanted to continue their longtime relationship they agreed on a risk-sharing arrangement. As long as the spot rate on the date of an invoice is between RM 3.5/$ and RM 4.5/$ DeMagistris will pay based on the spot rate. If the exchange rate falls outside this range, they will share the difference equally with Acua Leather Goods. The risk-sharing agreement will last for six months, at which time the exchange rate limits will be reevaluated. DeMagistris contracts to import leather coats from Acua for RM 8,000,000 or $2,000,000 at the current spot rate of RM 4.0/$ during the next six months. How much is the dollar cost of 6 months of imports to DeMagistris with and without the risk-sharing arrangement?
1. DeMagistris Fashion Company pays $2.92M without sharing and pays $2.07M with risk-sharing.
2. DeMagistris Fashion Company pays $3.20M without sharing and pays $2.67M with risk-sharing.
3. DeMagistris Fashion Company pays $2.7M without sharing and pays $3.67M with risk-sharing.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started