Question

Currencies-U.S. dollar foreign-exchange rates. in US$ per US$ Country/currency British Pound 1.5347 0.6516 Norwegian Kroner 0.1690 5.9172 Thai Baht 0.0310 32.258 Mr. Charles imports light bulbs from Norway to sell in Chicago. He can contract today to pay 10,500 Norwegian Kroner for a shipment of light bulbs and to sell the light bulbs for $1,850. However, all payments and receipts will not occur for 30 days. Which of the following is true of this scenario? a. Although the current US dollar Norwegian Kroner exchange rate provides a loss, the level of loss will get smaller if the Norwegian Kroner gains against the dollar. b. Although the current US dollar Norwegian Kroner exchange rate provides a profit, the level of profit will decline if the Norwegian Kroner gains against the dollar. c. The current US dollar Norwegian Kroner exchange rate provides a profit, and that level of profit is not dependent on the movement of the Norwegian Kroner gains against the dollar. d. Although the current US dollar Norwegian Kroner exchange rate provides a loss, the level of loss will get larger if the Norwegian Kroner gains against the dollar. e. Although the current US dollar Norwegian Kroner exchange rate provides a profit, the level of profit will increase if the Norwegian Kroner gains against the dollar.

Answer 1

Answer-

Given

1 Norwegian Kroner = 0.1690 in US $
The shipment of light bulbs cost = 10500 Norwegian Kroner
On converting this amount to US $ we get amount = 10500 x 0.1690 = $ 1774.50

The selling price of this light bulbs = $ 1850
Therefore there is a profit of $ 1850 - $ 1774.50 = $ 75.5
This resulted in profit, and as all the money transactions will be held after 30 days therefore the level of profit decreases if the US $ weakens against the Norwegian Kroner or the Norwegian Kroner gains against dollar.

Therefore the Option b is correct.

( As one has to pay more dollars if Norwegian Kroner gains against the dollar so there will be decline in profit)