Homework Answers
Importer- US based Co
Exporter- China based co
Importer has to buy Foreign Currency (i.e. Chinese Yuan) to settle balance of payment to exporter.
For First 2 years: Exchange Rate is 1 Yuan = 0.15 USD
Purchase Cost (in USD) = 800 units* 2 years* Yuan 13000 per unit* 0.15 USD = USD 3,120,000
For Third Year: Exchange Rate is 1 Yuan = 0.20 USD
Purchase Cost (in USD) = 600 units* 1 year* Yuan 13000 per unit* 0.20 USD = USD 1,560,000
Therefore, Cash Flow reflected at the end of third year in balance of payment will be USD 4,680,000 (USD 3,120,000 + USD1,560,000).
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