Assume you manage a firm that faces transaction exposure.Your company manufactures and sells bicycles around the world.You have just completed a large sale of bicycles to a chain of stores in Australia and received a promised payment of 300 AUD per bicycle.You have already sold 5,000 bicycles and are now awaiting payment which you expect to receive in 90 days.The exchange rate today is 1.30 AUD per USD.Over the next ninety days,the indirect exchange rate unexpectedly moves from 1.30 AUD to 1.25 AUD.What is the increase in domestic revenue due to this unexpected move in the exchange rate?

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The increase in domestic revenue due to the exchange rate moving from 1.30 AUD to 1.25 AUD can be calculated by comparing the USD value of the payment at both exchange rates. Initially, at 1.30 AUD/USD, the payment for 5,000 bicycles at 300 AUD each would convert to $1,153,846.15 (5,000 * 300 / 1.30). After the exchange rate changes to 1.25 AUD/USD, the same payment converts to $1,200,000 (5,000 * 300 / 1.25). The increase in domestic revenue is therefore $46,153.85 ($1,200,000 - $1,153,846.15), rounded to $46,154.

Assume You Manage a Firm That Faces Transaction Exposure