SPOT AND FORWARD RATES Anderson Australian Imports has agreed to purchase 15,000

Question

SPOT AND FORWARD RATES Anderson Australian Imports has agreed to purchase 15,000 cases of Australian wine for 4 million Australian dollars at today’s spot rate. The firm’s financial manager, Linda Wilson, has noted the following current spot and forward rates: U.S. Dollar/ Australian Dollar Australian Dollar/ U.S. Dollar Spot 0.9307 1.0745 30-day forward 0.9288 1.0767 90-day forward 0.9247 1.0814 180-day forward 0.9190 1.0881 On the same day, Wilson agrees to purchase 15 000 more cases of wine in 3 months at the same price of 4 million Australian dollars. a. What is the price of the wine in U.S. dollars if it is purchased at today’s spot rate? b. What is the cost in U.S. dollars of the second 15,000 cases if payment is made in 90 days and the spot rate at that time equals today’s 90-day forward rate? c. If the exchange rate for the Australian dollar is 1 03 to $1 in 90 days, how much will Wilson have to pay for the wine (in U.S. dollars)? Brigham, Eugene F.; Houston, Joel F. (2015-01-01). Fundamentals of Financial Management (Finance Titles in the Brigham Family) (Page 679). South-Western College Pub. Kindle Edition. Brigham, Eugene F.; Houston, Joel F. (2015-01-01). Fundamentals of Financial Management (Finance Titles in the Brigham Family) (Page 679). South-Western College Pub. Kindle Edition.

Explanation / Answer

The following information has been provided in the question :-

Spot Rate :

U.S. Dollar / Australian Dollar = .9307

This means that 1 Australian Dollar is equal to .9307 US$.

Australian $ / U.S $ = 1.0745

This means that 1 US$ is equal to 1.0745 Australian $

The cost of 1 US$ can also be calculated as 1 / .9307 = 1.0745 Australian $.

30 day forward rates :

U.S. Dollar / Australian Dollar = .9288

Australian dollar / U.S Dollar = 1.0767

90 day forward rates :

U.S. Dollar / Australian Dollar = .9247

Australian dollar / U.S Dollar = 1.0814

Now the above questions can be solved as follows :-

a) Price of wine in U.S Dollars if it is purchased at today's spot rate :

Price of wine in Australian dollars = 4 Million

Spot rate of 1 Australian $ = .9307 U.S $

Therefore, 4 Million Australian $ shall be = 4*.9307 = 3.7228 Million U.S $

Hence, the price of wine in U.S dollars is 3.7228 Million.

b) The cost in US $ of the second 15,000 cases if payment is made in 90 days and the spot rate at that time equals today's 90 day forward rate :

Today's 90 day forward rate = US $ / Australian $ = .9247

This means that 1 Australian $ = .9247 US $

Hence, if payment is made after 90 days and spot rate at that day equals today's 90 day forward rate, the payment will be made at the above rate.

Now price of 15000 cases in Australian $ = 4 Million

Hence, price in US $ = 4*.9247 = 3.6988 Million US $.

c) If exchange rate for the australian dollar is 1.03 to $1 in 90 days this means that 1$ shall be equal to 1.03 Australian dollars.

Now, price of the wine in Austalian $ = 4 Million

Also, 1US$ = 1.03 Australian $

Therefore, the payment in US$ shall be equal to 4 / 1.03 = 3.8835 miilion US$.

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