Question

11 (Extra Credit = 15 pts). A U.S. govern generators (including installation) from a trad written in USD for $1,588,000 ( 15 pts). A U.S. government agency located in Kuwait bought 29 standby power cors (including installation) from a trading company in Kuwait. The contract was effectively "Us Tor $1,588,000 (worth 447,180.80 KWD) since the exchange rate of 2816 was fixed in the . The performance period was 90 days; however, the buyer expected complications such as erial availability and security access passes from the host nation to delay contract performance. See ached excerpt from the contract. Assume payment terms were Net 30. Assume the Kuwaiti Dinar is a loating currency. The buyer was aware that the KWD had strengthened against the USD since 2003 Although Financial Management personnel informed the buyer that a hedging strategy would not be used, the buyer could see the 90-day currency exchange forward contracts indicating the exchange rate moving to USD/KWD = .265. From the buyer's perspective, which currency should the contract have been written in had the exchange rate not been fixed in the contract? _ What would be the financial advantage (expressed in USD) of doing so? a. USD; $212,679.55 avoided b. KWD; $99,472 avoided c. KWD; $212,679.55 avoided d. USD; $99,472 avoided e. None of the above

Answer 1

Since KWD had been strengthening against dollar since 2003, and US agency is importing it , the contract should have written in KWD to avoid paying more money.

Contract written as per 1 USD = 0.2816 KWD, which is forecasted to go down to 1 USD = 0.265

Company would have saved = $ 1588,000 *(0.2816-0.265)/0.265 = 99472 dollar

hence option B is correct answer