Company A manufactures British sports cars a number of which are exported to New

Question

Company A manufactures British sports cars a number of which are exported to New Zealand for payment in pounds sterling. The distributor sells the sport cars in New Zealand for New Zealand dollars. The New Zealand distributor is unable to carry all of the foreign exchange risk, and would not sell company a models unless Company A could share some of the foreign exchange risk. Company has agreed that sales for a given model year will initially be priced at a base spot rate between the New Zealand dollar in pounds sterling set to be the spot mid rate at the beginning of that model year as long as the actual exchange rate is within 5% of the base rate payment will be made in pounds sterling that is the New Zealand distributor assumes all foreign exchange risk however if the spot rate at time of shipment falls outside of the 5% range, company A will share equally the difference between the actual spot rate and the base rate for the current model year the base rate is NZ$1.64/Pounds.

A. What are the outside ranges within which the New Zealand importer must pay at the then current spot rate?

B. If MacLoren ships 10 sports cars to the New Zealand distributor at a time when the spot echange rate is NZ$1.7/pound, and each car has an invoice cost 32,000 pounds, what will be the cost to the distributor in New Zealand dolars? How many pounds will Company A recieve, and how does this compare with Company A's expected sales receipt of 32,000 pounds per car?

C If compnay A's automotive ships the same 10 cars to New Zealand at a time when the spot exchange rate is NZ$1.6500/pounds, how many New Zealand dollars will the distributor pay? How many pounds will Company A receive?

Explanation / Answer

1- current model year the base rate is NZ$1.64/Pounds.

5% above the range would be =1.64 + 1.64*5% = 1.722

5% below the base rate = 1.64 - 1.64*5% = 1.558

so importer will have to pay at the range of 1.722 to 1.558

2- what will be the cost to the distributor in New Zealand dolars

32000*1.64 *10 = 524800

How many pounds will Company A recieve

524800/1.7 = 308705.9

company A will receive 308705.9 pounds because current spot exchange rate is between the

how does this compare with Company A's expected sales receipt of 32,000 pounds per car

32000*10 = 320000 - 308705.9 =    11294.1

c- If compnay A's automotive ships the same 10 cars to New Zealand at a time when the spot exchange rate is NZ$1.6500/pounds, how many New Zealand dollars will the distributor pay

32000*10*1.64 = 524800

How many pounds will Company A receive

524800/1.65 = 318060.6

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