Assume an initial exchange rate where $1 = €1. An American company sells $10 mil

Question

Assume an initial exchange rate where $1 = €1. An American company sells $10 million in goods to a German firm. The American company will receive less than $10 million in revenues if (assume no transactions to prevent exchange rate risk):

They are paid in dollars and the exchange rate equals $1 = €1.10 on the day of delivery and payment.

They are paid in euros and the exchange rate equals $0.90 = €1 on the day of delivery and payment.

They are paid in dollars and the exchange rate equals $1 = €0.90 on the day of delivery and payment.

They are paid in euros and the exchange rate equals $1.10 = €1 on the day of delivery and payment.

They are paid in dollars and the exchange rate equals $1 = €1.10 on the day of delivery and payment.

They are paid in euros and the exchange rate equals $0.90 = €1 on the day of delivery and payment.

They are paid in dollars and the exchange rate equals $1 = €0.90 on the day of delivery and payment.

They are paid in euros and the exchange rate equals $1.10 = €1 on the day of delivery and payment.

Explanation / Answer

Ans b) They are paid in euros and the exchange rate equals $0.90 = €1 on the day of delivery and payment.

This is because the German firm will pay the American firm in Euros which teh American firm will get converted to Dollars. If on that day, the exchange rate is such that 1 euro is $0.90, then the value of 10 million euros will be lesser than $10 million.

In such a case, then american firm will recive less than $10 million.

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