Hudson Valley Distributors wants to be sure it has 10,000 cases of Beaujolais Nouveau to sell next November. In January, they enters into an agreement to buy the wine at a price of 34.62 euros to the case. Payment will be due at the end of November. They expect to sell the wine to restaurants and retailers for $63 per case. Hudson Valley has hedged its foreign exchange risk by entering into a forward contract to purchase euros in November at $1.30/euro. If the spot exchange rate at the end of November is $1.35/euro, Hudson Valley's gross profit will be

Question

Quizplus · Accepted Answer

To calculate the gross profit, we need to first calculate the cost of purchasing 10,000 cases of Beaujolais Nouveau at 34.62 euros per case:

10,000 cases * 34.62 euros/case = 346,200 euros

To convert this cost into dollars using the forward contract rate of $1.30/euro:

346,200 euros * $1.30/euro = $449,460

So, Hudson Valley's cost for the wine is $449,460.

Next, we need to calculate the revenue from selling the wine at $63 per case:

10,000 cases * $63/case = $630,000

So, Hudson Valley's revenue from selling the wine is $630,000.

To convert this revenue into euros using the spot exchange rate of $1.35/euro:

$630,000 / $1.35/euro = 466,666.67 euros

Let's calculate the gross profit by subtracting the cost from the revenue:

Gross profit = $630,000 - $449,460 = $180,540

To convert this gross profit into euros using the spot exchange rate of $1.35/euro:

$180,540 / $1.35/euro = 133,777.78 euros

Therefore, Hudson Valley's gross profit will be 133,777.78 euros or $180,540.

Note: The correct answer is D, but it should be noted that the answer choices do not include the option of $180,540, which is the gross profit in dollars.

Hudson Valley Distributors Wants to Be Sure It Has 10,000