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 $2.01/£ the U.S. firm will realize a ________ of ________.

Question

Quizplus · Accepted Answer

If the exchange rate changes to $2.01/£, the U.S. firm will receive £98,507.46 ($100,000/2.01). However, at the time of sale, the U.S. firm expected to receive $203,000 ($2.03/£ x £100,000), so they will have a loss of $2,000 ($203,000 - $201,000).

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