Question

can someone please assist with 2b and 2c and 2d you need 2b to do the rest.

ny's do Air, have inte low Que 1. Tuxedo Air Goes International Mark Taylor and Jack Rodwell, the owners of Tuxedo Air, have been in discussions with a light aircraft dealer in Italy about selling the company's planes in Europe. Tracy Jordon, the dealer, wants to add Tuxedo Air to his current retail line. Tracy has told Mark and Jack that he feels the retail sales will be ap- proximately €5 million per month. All sales will be made in euros, and Tracy will retain 5 percent of retail sales as a com- mission, which will be paid in euros. Because the planes will be customized to order, the first sales will take place in one month. Tracy will pay Tuxedo Air for the order 90 days after it is filled. This payment schedule will continue for the length of the contract between the two companies. Mark and Jack are confident the company can handle the extra volume with its existing facilities, but they are unsure about the potential financial risks of selling their planes in Eu- rope. In their discussion with Tracy, they found that the cur- rent exchange rate is $1.35/EUR. At the current exchange rate, the company would spend 80 percent of the sales on production costs. This number does not reflect the sales com- mission paid to Tracy. 3.

Answer 1

Answer 2 (a):

If the dollar strengthens against Euro it will directly impact the Sales realisation in terms of USD of Tuxedo Air since the signed contract with Tracy Jordon, Italy in currency Euro, hence whenever there is any strengthen in USD will decrease the sales realisation and in all it will also impact the overall profitability of the Tuxedo Air in US dollar terms.

And its impact will be reversed if the dollar weakens against the Euros, then sales realisation in terms of USD will be higher and will increase the overall profitability of the Tuxedo Air in terms of USD.

Answer 2 (b):

It can be done through below calculation: Gain will be 1,012,500 USD or 750,000 Euro considering the given exchange rate of $ 1.35/EUR.

Sales made by Tracy Jordon	5000000
(5 million Euros)
Less: 5% commission charged by Tracy Jordon	250000
Net Sales Realisation (in Euros)	4750000
Net Sales Realisation (in USD)	6412500
Ex. Rate $1.35/EUR
Cost of Production (in USD)	5400000
80% of Sales * Ex. Rate $ 1.35/EUR
Proposed Gain (in USD)	1012500
Proposed Gain (in EUR) Ex. Rate $1.35/ EUR	750000

Answer 2 (c):

It can be done through below calculation: Gain will be 840,000 USD or 750,000 Euro considering the given exchange rate of $ 1.12/EUR.

Sales made by Tracy Jordon	5000000
(5 million Euros)
Less: 5% commission charged by Tracy Jordon	250000
Net Sales Realisation (in Euros)	4750000
Net Sales Realisation (in USD)	5320000
Ex. Rate $1.12/EUR
Cost of Production (in USD)	4480000
80% of Sales * Ex. Rate $ 1.12/EUR
Proposed Gain (in USD)	840000
Proposed Gain (in EUR) Ex. Rate $1.12/ EUR	750000

Answer 2 (d) :

If company agrees to hedge its currency risk by forward contract at $1.25/EUR then company will eliminate the uncertainty about future changes in the exchange rate if it goes below $1.25/EUR to any level and their profit at this exchange rate will be fixed.

Sales made by Tracy Jordon	5000000
(5 million Euros)
Less: 5% commission charged by Tracy Jordon	250000
Net Sales Realisation (in Euros)	4750000
Net Sales Realisation (in USD)	5937500
Ex. Rate $1.25/EUR
Cost of Production (in USD)	5000000
80% of Sales * Ex. Rate $ 1.25/EUR
Proposed Gain (in USD)	937500
Proposed Gain (in EUR) Ex. Rate $1.25/ EUR	750000

After hedging Tuxedo Air profit will be freeze in the given scenario for USD 937,500 there would not be any risk of future risk of exchange rate fluctuation on the profitability of the company.

Implications of this Forward Contract:

If company agrees to hedge at $ 1.25/EUR beside that company drop the opportunity to getting the gains from weakens of USD, if USD weaken in future company would not able to make any profit from exchange rate fluctuation. Hedging works on both side from uncertainty downside in the currency and also gain in upward side.

	Ex. Ch Rate $ 1.35/Eur	Ex. Ch Rate $ 1.25/Eur	Ex. Ch Rate $ 1.12/Eur
Gain in USD	1012500	937500	840000
Changes in Exchange Rate		0.10	0.13
		($ 1.35/Eur - $ 1.25/Eur)	($ 1.25/Eur - $ 1.12/Eur)
Difference in Gain in USD		75000	97500
		(1012500 - 937500)	(937500-840000)
per point changes in Gain in USD		7500	7500

Above given data also clarifies that 0.01 point changes in the currency rate will give an impact of 7500 USD in total profitability of the company whereas company has hedged at $ 1.25/ Eur. He has also lost the gain of weaken of USD against Euros.