To find: The profit if the rate of exchange goes up or down, the break-even exchange rate and the percentage change.
Introduction:
The price of a country’s currency that in terms of another nation’s currency is the exchange rate. The rate of exchange can be either floating or fixed. The two components of the exchange rates are the foreign currency and the domestic currency.
Answer to Problem 9QP
The break-even exchange rate is S$1.15938 for a US$, and the percentage change is -7.55%.
Explanation of Solution
Given information:
The exchange rate quotations (Figure 18.1) that are stated in the Journal WS as on 13th April 2014 (Thursday) is as follows:
Country U’s dollar foreign exchange rate in the late City NY trading:
Country/currency | Equivalent US$ | US$ VS. % CHG | PER US$ |
Thursday | YTD | Thursday | |
Singapore dollar | 0.7974 | -3.3 | 1.2541 |
Note: The term YTD stands for year to date, the term “chg” refers to change.
Person X’s company imports the motherboards for computers from Country S. Person X have just made an order to Person X for 30,000 motherboards at a cost of S$185.50 per motherboard. Person X will make a payment for the shipment when it reaches within ninety days. Person X can sell the motherboards for $160 each. The rate of exchange goes up or down by 10% over the upcoming 90 days.
Formula to compute the profit if the rate of exchange is the same:
Computation of the profit:
Hence, the profit is $362,554.82.
Computation of the profit if there is a rise in the rate of exchange:
If there is an increase in the rate of exchange, then the cost has to be adjusted by the increased rate of exchange.
Hence, the profit is $465,958.93.
Computation of the profit if there is a decrease in the rate of exchange:
If there is a decrease in the rate of exchange, then the cost has to be adjusted by the decreased rate of exchange.
Hence, the profit is -$130,494.64.
Computation of the break-even exchange rate:
To compute the change in the break-even exchange rate, it is essential to determine the rate of exchange that makes the cost in Country S’s dollars and that must be equivalent to the selling price of Country U’s dollars. Thus, the computation are as follows:
Note:
Hence, the break-even exchange rate is S$1.15938 for $1.
Formula to compute the percentage change:
Computation of the percentage change:
Hence, the percentage change is - 0.0755 or – 7.55%.
Want to see more full solutions like this?
Chapter 18 Solutions
ESSENTIALS OF CORPORATE FINANCE
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education