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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

SPOT AND FORWARD RATES Arvin 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, Sarah Vintnor, has noted the following current spot and forward rates.

  U.S. Dollar/Australian Dollar Australian Dollar/U.S. Dollar
Spot 0.7930 1.2610
30-day forward 0.7927 1.2615
90-day forward 0.7921 1.2625
180-day forward 0.7911 1.2640

On the same day, Vintnor agrees to purchase 15,000 more cases of wine in 3 months at the same price of 4 million Australian dollars.

  1. a. What is the price of the wine in U.S. dollars if it is purchased at today’s spot rate?
  2. b. What is the cost in U.S. dollars of the second 15,000 cases it payment is made in 90 days and the spot rate it that time equals today's 90-day forward rate?
  3. c. If the exchange rate for the Australian dollar is 1.20 to $1 in 90 days, how much will Vintnor have to pay for the wine (in U.S. dollars)?

a)

Summary Introduction

To determine: The price of 15,000 cases of wine in terms of Country U dollars.

Introduction:

Spot exchange rate indicates that particular rate to get exchange the currency of a foreign country at the current date.

Explanation

The number of cases purchased of wine is 15,000.

The price of 15,000 cases in Continent A dollars is 4 million.

The spot market rate for one Continent A dollar in the Country U dollars is $1.2610.

The formula to calculate price in Country U dollar:

Price in Country U dollar=Price in Continent A dollar×Spot rate

Compute the price in Country U dollar:

Price in Country U dollar

b)

Summary Introduction

To determine: The price of 15,000 cases of wine in terms of US dollars at 90-days forward rate.

Introduction:

The rate at which the bank exchanges one country’s currency with another country currency at a future date is termed as forward exchange rate. This happens when it enters into a contract of forward contract.

c)

Summary Introduction

To determine: The price of 15,000 cases of wine in terms of US dollars, if exchange rate of one US dollar is 1.20 Australian dollars.

Introduction:

Exchange rate is the rate which indicates the conversion rate for the currency of a country and which can be obtained in exchange of a currency of another country is an exchange rate.

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