ABC Company, an Australian firm, has a USD 385 million payable in one year. ABC is concerned that the exchange rate might change adversely. It enters into a risk sharing arrangement with its supplier. The AUD/USD base rate is set at 0.77. There is a neutral zone of 0.693 to 0.847. Outside of the neutral zone, the parties split the exchange rate change equally. Suppose the final exchange rate is 0.9625, how much must ABC pay? Select one: a. 318.6837 million b. 334.6179 million c. 286.8154 million d. 22.2337 million e. 370.5625 million
ABC Company, an Australian firm, has a USD 385 million payable in one year. ABC is concerned that the exchange rate might change adversely. It enters into a risk sharing arrangement with its supplier. The AUD/USD base rate is set at 0.77. There is a neutral zone of 0.693 to 0.847. Outside of the neutral zone, the parties split the exchange rate change equally. Suppose the final exchange rate is 0.9625, how much must ABC pay? Select one: a. 318.6837 million b. 334.6179 million c. 286.8154 million d. 22.2337 million e. 370.5625 million
Chapter10: Measuring Exposure To Exchange Rate Fluctuations
Section: Chapter Questions
Problem 2ST
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Question
ABC Company, an Australian firm, has a USD 385 million payable in one year. ABC is concerned that the exchange rate might change adversely.
It enters into a risk sharing arrangement with its supplier.
The AUD/USD base rate is set at 0.77. There is a neutral zone of 0.693 to 0.847. Outside of the neutral zone, the parties split the exchange rate change equally.
Suppose the final exchange rate is 0.9625, how much must ABC pay?
Select one:
a. 318.6837 million
b. 334.6179 million
c. 286.8154 million
d. 22.2337 million
e. 370.5625 million
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