HiTech Inc. is headquartered in Indonesia with a contract to the Swedish militar

Question

HiTech Inc. is headquartered in Indonesia with a contract to the Swedish military; HiTech expects to receive 10,000,000,000 Swedish krona from delivering anti-missile software for the Saab JAS 39 Gripen fighter aircraft. North Korea’s military has also bought some of HiTech’s software for 20,000,000,000 won. The contract with North Korea explicitly states that HiTech’s profits in North Korean won will be converted to US dollars at the official rate. How many Indonesian rupiah will HiTech have after converting the currencies it receives from Sweden and North Korea? Assume the conversion of the won is being done this week and the official rate never changes (it is a fixed exchange rate). Also assume the Swedish krona exchange rate to the rupiah is set by the foreign exchange market. Find spot rates on the web.  

A_) Decide upon the exchange rate HiTech should use for its Swedish krona. Answer = _________ Rupiah/USD.

B_) What is the official won/USD exchange rate? ______________ won/USD What won/UDS exchange rate should HiTech use? ______________ won/USD Explain your answer briefly: C) How many Indonesian rupiah will HiTech have after converting the currencies it receives from Sweden and North Korea? Answer = _____________

Explanation / Answer

Exchange Rates:

13550.4 Rupiah / 1 USD (Google Finance Current Market Exchange Rate)

1628.07 Rupiah / 1 Swedish Krona (Google Finance Market Exchange Rate)

8.32 Swedish Krona / 1 USD (Google Finance Market Exchange Rate)

900 Won / 1 USD (Official Exchange Rate as Given by Google Finance)

8000 - 9000 Won / 1 USD ( Actual Free Market Rate determined by the principles of supply and demand. It is impossible to zero in on a single free market conversion rate as North Korea does not have a free market in the first place and this conversion rate range is determined from reports on North Korean black market transactions)

(A) The conversion rate to be used should be the free market (which is also the official) rate given by:

13550.4 Rupiah / 1 USD OR 1628.07 Rupiah / 1 Swedish Krona

(B) Official Won to USD Exchange Rate 900 Won / 1 USD

The exchange rate that Hitech should use is the free market exchange rate of 8000-9000 Won / 1 USD. This would give the real value of Hitech's earnings from North Korea as the official exchange rate which is lower than the free market exchange rate is artificially propping up earnings for foreign companies (one of which is Hitech). It is unrelated to the true market conditions of supply and demand.

Receipts from Swedish Military = 10,000,000,000 OR 10 Billion Swedish Krona

Official/Free Market Exchange Rate = 1628.07 Rupiah / 1 Swedish Krona (Google Finance)

Therefore, Receipt Value in Rupiah = 10 Billion x 1628.07 = 1628070,00,00,000 = 16280.7 Billion Rupiah

Receipts from North Korean Military = 20 billion won

Official Exchange Rate = 15.05g Rupiah / 1 Won (This is not the free market rate)

Therefore, Receipt Value in Rupiah = 20 x 15.056 = 301.12 Billion Rupiah

Therefore, Total Value of Receipts of Hitech = 16280.7 + 301.12 = 16581.82 Billion Rupiah

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