An Australian company (importer) buys wine from California (US). The next order is worth $2 millions...
An Australian company (importer) buys wine from California (US). The next order is worth $2 millions and the payment is due in 180 days. The spot rate is AUD USD 1.30.
(a) Does the importer need to buy or sell U.S. dollars to make the payment? What is the exchange of currencies?
(b) How many Australian dollars does the company need to make the payment through the spot market today?
(c) Is an appreciation of the U.S. dollar in the next six months good or bad news for the importer? Why?
Homework Answers
| SPOT EXCHANGE RATE |
| (a) In the given case the importer is an Australian company and the exporter is an American company |
| So Australian company may have agreed to pay to American company in USD |
| Therefore Importer need to buy american currency to settle the transaction. |
| (b)The given currency is 1USD = 1.30AUD |
| Australian dollars need to make the payment through the spot market = 2 x 1.30 = 2.60AUD |
| ©Appreciation of the USD in the next 6 months is an bad news for the importer |
| For example if the USD appreciates by 10% in next 6months,then the exchange rate |
| is 1USD = 1.30 x 110% = 1.43 |
| Australian dollars need to make the payment through the 180 Days forward market = 2 x 1.43 = 2.86AUD |
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