Suppose you are a distributor of Audis in Bloomington. In anticipation of increased demand in the summer, right after graduation at IU, you placed an order on Feb 1 for 100 Audi A4s to be delivered on May 1. Payment will be made on delivery of 5,500,000 for 100 cars.

Suppose the spot exchange rate on Feb 1 = S($/) = 1.07 $/. Suppose the market price of an Audi A4 is $60,000 in the US. Assume that the market sets the price not your dealership, so you cannot change the price.

(a) Suppose the USD depreciates to S($/)= 1.1 $/ on May 1 when payment is due. If you use the spot exchange rate on May 1 to pay the German supplier, how much will you have to pay for each car in USD($)? 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 the USD appreciates to S($/)= 0.99 $/ on May 1. If you use the spot exchange rate on May 1 to pay the German supplier, how much will you have to pay for each car in USD($)? 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?