MacLoren Automotive.MacLoren Automotive manufactures British sports cars, a number of which are exported to New Zealand for payment in pounds sterling. The distributor sells the sports cars in New Zealand for New Zealand dollars. The New Zealand distributor is unable to carry all of the foreign exchange risk, and would not sell MacLoren models unless MacLoren could share some of the foreign exchange risk. MacLoren has agreed that sales for a given model year will initially be priced at a "base" spot rate between the New Zealand dollar and pound sterling set to be the spot mid-rate at the beginning of that model year. As long as the actual exchange rate is within plus or minus 5% of that base rate, payment will be made in pounds sterling. That is, the New Zealand distributor assumes all foreign exchange risk. However, if the spot rate at time of shipment falls outside of this plus or minus 5% range, MacLoren will share equally (i.e., 50/50) the difference between the actual spot rate and the base rate. For the current model year the base rate is NZ$1.6200/.

a. What is the upper band of the exchange rate range? NZ$____ /pound (Round to four decimal places.)

What is the lower band of the exchange rate range? NZ$___/pound (Round to four decimal places.)

b. If MacLoren ships 25 sports cars to the New Zealand distributor at a time when the spot exchange rate is NZ$ 1.6900 divided by pound, and each car has an invoice cost 31,000, what will be the cost to the distributor in New Zealand dollars? NZ$____ (Round to the nearest New Zealand dollar.)

How many pounds will MacLoren receive? pound____ (Round to the nearest pound sterling.)

c. If MacLoren Automotive ships the same 25 cars to New Zealand at a time when the spot exchange rate is NZ$ 1.6100 divided by pound, how many New Zealand dollars will the distributor pay? NZ$____(Round to the nearest New Zealand dollar.)

How many pounds will MacLoren Automotive receive? pound____ (Round to the nearest pound sterling.)

d. Does a risk-sharing agreement such as this one shift the currency exposure from one party of the transaction to the other? (Select the best choice below.) A. The distributor bears no risk within the 5% range. McLorean carries all of the risk within 5%. If the exchange rate falls outside the 5% range, then the distributor will bear all of the risk. B. The distributor bears no risk within the 5% range. McLorean carries all of the risk within 5%. If the exchange rate falls outside the 5% range, MacLoren shares the risk with the distributor. C. MacLoren bears no risk within the 5% range. The distributor carries all of the risk within 5%. If the exchange rate falls outside the 5% range, MacLoren shares the risk with the distributor. D. MacLoren bears no risk within the 5% range. The distributor carries all of the risk within 5%. If the exchange rate falls outside the 5% range, then MacLoren will bear all of the risk.

e. Why is such a risk-sharing agreement of benefit to MacLoren? Why is it of benefit to the New Zealand distributor? "Both parties in practice benefit from this risk-sharing agreement. The manufacturer has predictable revenues within the range, while the distributor bears a moderate level of currency risk within the 5% range. The distributor will hopefully be able to provide a more stable pricing to pass on to the customer, which will also benefit the manufacturer through a more stable and sustainable distributor sales outlet." The above statement is true or false? (Select from the drop-down menu.)