Assume that an importer of wine were to purchase 5,000 cases of premium French Bordeaux for 700,000 euros.Further assume that the quoted exchange rates are as follows: spot rate = .770 euros to the U.S.dollar;30-day forward rate = .775 euros to the U.S.dollar;and 90-day forward rate = .778 euros to the U.S.dollar.If the actual currency exchange rate at the time payment is due in 90 days is equal to the forward rate of .778 euros to the U.S.dollar,how much would the wine cost the importer in U.S.dollars if payment is made in 90 days? Round to the nearest dollar.

Question

Quizplus · Accepted Answer

The cost of the wine in euros is 700,000 euros.

To find the cost in U.S. dollars, we need to convert using the exchange rate at the time payment is due. In this case, it is the 90-day forward rate of .778 euros to the U.S. dollar.

To calculate the cost in U.S. dollars:

Cost in U.S. dollars = Cost in euros x Exchange rate in U.S. dollars/euros

Cost in U.S. dollars = 700,000 x .778

Cost in U.S. dollars = $544,600 (rounded to the nearest dollar)

Therefore, the wine will cost the importer $544,600 in 90 days. The best choice is D.

Assume That an Importer of Wine Were to Purchase 5,000