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 which you expect to receive in 90 days.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

To calculate the fall in domestic revenue due to the unexpected move in the exchange rate, we need to first calculate the amount of revenue we expect to receive from the sale of tricycles in Swedish krona:

375 krona/tricycle x 3,000 tricycles = 1,125,000 krona

Next, we need to convert that amount into U.S. dollars using the exchange rate at the time we made the sale:

1,125,000 krona ÷ 7.5 krona/$ = $150,000

So we expect to receive $150,000 for the sale of the tricycles. However, due to the unexpected move in the exchange rate, we will actually receive fewer dollars than we expected. To calculate the difference, we need to convert the expected revenue into dollars at the new exchange rate:

1,125,000 krona ÷ 7.7 krona/$ = $146,104.64

The fall in domestic revenue is the difference between the expected revenue and the actual revenue:

$150,000 - $146,104.64 = $3,895.36, which is rounded to $3,896.

Therefore, the correct answer is D, $3,896.

Assume You Manage a Firm That Faces Transaction Exposure