Assume you manage a firm that faces transaction exposure. Your company manufactures and sells tricycles around the world. You have just completed a large sale of tricycles to a chain of stores in Sweden and received a promised payment of 375 krona per tricycle. You have already sold 3,000 tricycles and are now awaiting payment. The exchange rate today is 7.5 krona per dollar. Over the next ninety days, the indirect exchange rate unexpectedly moves from 7.5 to 7.7. What is the fall in domestic revenue due to this unexpected move in the exchange rate?

Question

Quizplus · Accepted Answer

The fall in domestic revenue is calculated by finding the difference in revenue at the two exchange rates. At 7.5 krona per dollar, the revenue is (375 krona/tricycle * 3000 tricycles) / 7.5 = $150,000. At 7.7 krona per dollar, the revenue is (375 krona/tricycle * 3000 tricycles) / 7.7 = $146,104. The fall in revenue is $150,000 - $146,104 = $3,896.

Assume You Manage a Firm That Faces Transaction Exposure