The Land's Beginning Company Inc. (LBC), imports extreme condition outdoor wear and equipment from The Hudson Bay Company (HBC) located in Canada. With the steady decline of the U.S dollar against the Canadian dollar LBC is finding a continued relationship with HBC to be an increasingly difficult proposition. In response to LBC's request, HBC has proposed the following risk-sharing arrangement. First, set the current spot rate as the base rate. As long as spot rates stay within 5% (up or down) LBC will pay at the base rate. Any rate outside of the 5% range, HBC will share equally with LBC the difference between the spot rate and the base rate. If the current spot rate is C$1.20/$, what are the upper and lower limits for trading to take place at C$1.20?

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Quizplus · Accepted Answer

The base rate is C$1.20/$. A 5% range means the rate can fluctuate 5% above or below this base rate. 5% of 1.20 is 0.06, so the upper limit is 1.20 + 0.06 = C$1.26/$ and the lower limit is 1.20 - 0.06 = C$1.14/$.