Pont has entered into a currency risk sharing arrangement with British Gas. Under the contract, Du Pont agrees to pay British Gas a base price of $10 million for gas purchases, but the parties would share the currency risk equally beyond a neutral zone, specified as a band of exchange rates: $Within the neutral zone, Du Pont must pay BG the pound equivalent of $10 million at the base rate of $Suppose the spot rate at the time of payment is £1 = $How much will Du Pont owe British Gas?
A) $10 million
B) $9,702,381
C) $9,588,235
D) $9,819,277

Question

Quizplus · Accepted Answer

Within the neutral zone, Du Pont must pay BG the pound equivalent of $10 million at the base rate of $. Thus, within the neutral zone, Du Pont owes BG £6,310,699. Du Pont shares the currency risk equally beyond the neutral zone, which is specified as a band of exchange rates. If the spot rate is £1 =$, then Du Pont would owe BG £6,197,552. Therefore, the total amount Du Pont owes British Gas is £6,197,552 which equals $9,702,381.

Pont Has Entered into a Currency Risk Sharing Arrangement with British