A U.S. firm sells merchandise today to a British company for £150,000. The current exchange rate is $1.55/£ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. If the exchange rate changes to $1.58/£ the U.S. firm will realize a ________ of ________.
A) loss; $4,500
B) gain; $4,500
C) loss; £4,500
D) gain; £4,500

Question

Quizplus · Accepted Answer

The U.S. firm will realize a gain because the value of the pound increases from $1.55 to $1.58. Initially, £150,000 would convert to $232,500 (150,000 * 1.55). With the new exchange rate, the same amount converts to $237,000 (150,000 * 1.58). The difference, or gain, is $4,500 ($237,000 - $232,500).

A US Firm Sells Merchandise Today to a British Company for for £150,000