Question 17 011.25 pts P&G; enters into a currency risk sharing arrangement with

Question

Question 17 011.25 pts P&G; enters into a currency risk sharing arrangement with a British firm. Under the contract, P&G; agrees to pay the British firm 8.5 million pounds in 90 days, but the parties will share the currency risk equally beyond a neutral zone by using the mid-point between the ending rate and the boundary. The exchange rates for the neutral zone range from $1.67 to 1.73/E. Within the neutral zone, P&G; must pay the British firm with pound at the base rate of $1.70/E. Suppose the spot rate at the time of payment (the ending rate) is £1 $1.63. How much will P&G; owe the British firm in terms of US dollar? $14,450,000 O$14,025,000 o $14,195,000

Explanation / Answer

Spot rate at the time of payment is $ 1.63 means its outside the neutral Zone. So as per agreement it shares risk equally by using mid point between the ending rate and boundary.

So mid point between $1.63 and $1.67 is $1.65

As the firm has to pay 8.5 million pounds at rate of $1.65

So P& G owe the british firm in terms of US dollars is 1.65*8.5 million = $ 14,025,000

Option 2.

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