A U.S. firm is expecting to pay cash flows of 20 million Egyptian pounds and 25 million Qatar rials. The current spot exchange rates are: $1 = 5.829 pounds and $1 = 3.645 rials. If these cash flows are delayed one year and the expected spot rates at that time will be $1 = 5.895 pounds and $1 = 3.899 rials, then what is the difference in dollars paid that was caused by the delay?

Question

Quizplus · Accepted Answer

The difference in dollars paid that was caused by the delay is $0.485 million less. This is because the Egyptian pound is expected to appreciate against the dollar, while the Qatar rial is expected to depreciate against the dollar. As a result, the U.S. firm will receive more dollars for its Egyptian pound cash flows and fewer dollars for its Qatar rial cash flows. The net effect is a decrease in the total amount of dollars paid.

A US Firm Is Expecting to Pay Cash Flows of 20