Assume you manage a firm that faces transaction exposure.Your company manufactures and sells automobile parts around the world.You have just completed a large sale of parts to an auto manufacturer in France and received a promised payment of €148 per part.You have already sold 13,000 parts and are now awaiting payment which you expect to receive 90 days from now.The exchange rate today is $1.20/€.Over the next ninety days,the direct exchange rate unexpectedly moves from $1.20/€ to $1.17/€.What is the loss in domestic revenue due to this unexpected move in the exchange rate?

Question

Quizplus · Accepted Answer

The loss in domestic revenue due to the unexpected move in the exchange rate is $57,720. This is calculated as follows:Original value of the sale: €148 x 13,000 = €1,924,000Expected value of the sale in dollars at the original exchange rate: €1,924,000 x $1.20/€ = $2,308,800Actual value of the sale in dollars at the new exchange rate: €1,924,000 x $1.17/€ = $2,251,080Loss in domestic revenue: $2,308,800 - $2,251,080 = $57,720

Assume You Manage a Firm That Faces Transaction Exposure