Hudson Valley Distributors wants to be sure it has 10,000 cases of Beaujolais Nouveau to sell next November.In January,they enter 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 find the total revenue and deduct the total expenses.

Total revenue = Selling price per case x Number of cases sold

Selling price per case = $63

Number of cases sold = 10,000

Total revenue = $63 x 10,000 = $630,000

Total expenses = Cost of purchasing the wine (in euros) + Cost of purchasing euros (in USD)

Cost of purchasing the wine = Price per case in euros x Number of cases = 34.62 euros x 10,000 = 346,200 euros

Cost of purchasing euros (in USD) = Number of euros required x Forward rate = 346,200 euros x $1.30/euro = $449,460

If the spot exchange rate at the end of November is $1.35/euro, then the cost of purchasing euros (in USD) would be:

Cost of purchasing euros (in USD) = Number of euros required x Spot rate = 346,200 euros x $1.35/euro = $467,970

Therefore, the total expenses would be:

Total expenses = Cost of purchasing the wine (in euros) + Cost of purchasing euros (in USD) = 346,200 euros + $449,460 = $766,314

Gross profit = Total revenue - Total expenses = $630,000 - $766,314 = -$136,314

Since the gross profit is negative, it means that Hudson Valley Distributors would incur a loss of $136,314. However, this calculation assumes that Hudson Valley would purchase the euros at the forward rate of $1.30/euro, which may not be the case if exchange rates fluctuate. If exchange rates fluctuate, the actual gross profit could be different from this calculation.

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