Suppose a U.S.importer purchases an Italian product today but will not pay for it for 90 days.The cost of the product today is 30,000 euros.The spot exchange rate today is .6233 euros per dollar.If the U.S.importer does not hedge the position,which of the following spot exchange rates in 90 days will yield the highest returns?

Question

Quizplus · Accepted Answer

To calculate the return on investment, we need to convert the cost of 30,000 euros into dollars using the current spot exchange rate of .6233 euros per dollar:

30,000 euros * .6233 dollars/euro = $18,699

In 90 days, the U.S. importer will need to pay for the product at the prevailing spot exchange rate. If the exchange rate has gone up, the importer will need to pay more dollars to convert to euros. If the exchange rate has gone down, the importer will need to pay fewer dollars to convert to euros.

To maximize returns, we want the exchange rate in 90 days to be as high as possible. Choice A) 0.6833 euros per dollar is the highest of the given options, so it offers the best chance of maximizing returns.