A U.S. firm sells merchandise today to a British company for £100,000. The current exchange rate is $2.03/£, 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 $2.05/£ the U.S. firm will realize a ________ of ________.

Question

Quizplus · Accepted Answer

The U.S. firm will gain $2000 because the exchange rate increased from $2.03/£ to $2.05/£, meaning they will receive more dollars for the same amount of pounds (£100,000). The gain is calculated as (£100,000 * $2.05) - (£100,000 * $2.03) = $205,000 - $203,000 = $2,000.

A US Firm Sells Merchandise Today to a British Company for for £100,000