Suppose you are a purchasing manager of a company in Europe. You...

Suppose you are a purchasing manager of a company in Europe. You just signed a contract with a supplier in Singapore for 1,000 items at a cost of 57,000 SGD.At the current exchange rate, it will cost you 30,000 Euros or 30 per item. Your transportation, insurance, advertising and selling costs will be about 17 per item. If the market selling price for this type of product in Europe is 60. The shipment of goods from Singapore is scheduled to occur in three months and payment for the shipment need not be made until that time. Two outcomes are expected three months later: 1. Euro is 'weakened' to 1.50 SGD to 1 Euro; 2. Euro is 'strengthened' to 2.40 SGD to 1 Euro.

Q1. Compute your gross profit and gross profit margin (i.e., gross profit/sales revenue) under the three scenarios (i.e., Euro stays the same, Euro is weakened, and Euro is strengthened).

Q2. There are several alternative arrangements you can make to hedge the currency risk. Computer your gross profit and gross profit margin under the three scenarios (i.e., Euro stays the same, Euro is weakened, and Euro is strengthened) for the above two alternatives.

a. (Forward Contract) Your bank agrees to sell you 57,000SGD in three month time at a rate of 1.8 SGD to the Euro. Assume that if you take this option, you will ALWAYS buy from the bank no matter what the exchange rate is three month later.

b.(Exchange Rate Clause in Supply Agreement) The supplier is willing to share half of the gain/loss due to exchange rate fluctuation. For example, if your cost of purchasing in Euros increased by 50% due to a weakened Euro, then your actual payment to the supplier converted to Euros only increases 25% and the supplier bears the remaining 25% loss.