Question
Foreign Exchange (FOREX) Problem-Solution Set Read the problems, study the solution, then write your analysis of the problem-solution give a similar example to show mastery
Foreign Exchange (FOREX) Problem-Solution Set
Read the problems, study the solution, then write your analysis of the problem-solution give a similar example to show mastery of the concept; discuss what you learned or how you would apply the concept; and/or consider if is there an alternative way to look at the problem.
Problem #1
Problem: You have an accounts payable to a German exporter for 100 Porsche Cayenne SUVs. The seller offers a 2 percent discount for payment within 10 days and full payment due in 30 days (2/10 net 30). Today the exchange rate is $1.40 per Euro. You notice that the 30 day forward rate for the $/Euro is $1.38. What should you do? You owe 70,000 Euros for each of the cars (before any discounts). [Show your work, and analysis.]
Solution: Take the discount. Pay $96,040 per car (68,600 x $1.40) within 10 days rather than $96,600 in 30 days if you locked in the forward rate. You could have saved more if the future spot rate was better than $1.372 ($96,040/70,000) but you have no idea what the future spot rate is going to be and would you want to risk it being higher than $1.372/?
Your Analysis:
Problem #2
Problem: You are changing planes in London for a flight to Paris where you will connect with your flight to Capetown. You are picking up reading material for the flight and are looking at the prices listed on The Economist magazine which conveniently lists prices in several currencies. You note that the price in Pounds is 2.40 pounds and the price in Euros is 2 Euros. The exchange rate for the dollar (your credit card was issued in the USA) is $1.59/pound and $1.3837/euro. Should you buy reading materials now or wait until youre in Paris?
Solution: Price in London is 2.40 x $1.59 = $3.81
Versus 2 x $1.3837 = $2.76
Wait until Paris to buy.
Your Analysis:
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored 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