Assume you manage a firm that faces transaction exposure.Your company manufactures and sells automobile parts around the world.You have just completed a large sale of parts to an auto manufacturer in Italy and received a promised payment of €108 per part.You have already sold 7,000 parts and are now awaiting payment which you expect to receive 90 days from now.The exchange rate today is $1.17/€.Over the next ninety days,the direct exchange rate unexpectedly moves from $1.17/€ to $1.15/€.What is the loss in domestic revenue due to this unexpected move in the exchange rate?

Question

Quizplus · Accepted Answer

The loss in domestic revenue is calculated by comparing the expected revenue at the original exchange rate with the actual revenue received at the new exchange rate. Initially, the expected revenue in dollars for selling 7,000 parts at €108 each at an exchange rate of $1.17/€ is 7,000 parts * €108/part * $1.17/€ = $878,760. After the exchange rate changes to $1.15/€, the actual revenue becomes 7,000 parts * €108/part * $1.15/€ = $861,000. The loss in domestic revenue is $878,760 - $861,000 = $17,760. However, none of the provided options exactly match this calculation, suggesting a possible miscalculation in the question's setup or answer choices. Given the options, the closest match or intended answer might be a different calculation or an error in the question's presentation.

Assume You Manage a Firm That Faces Transaction Exposure