Question

X Problem 12-2 (algorithmic) Question Help Acuña Leather Goods. DeMagistris Fashion Company, based in New York City, imports leather coats from Acuña Leather Goods, a reliable and longtime supplier, based in Buenos Aires, Argentina Payment is in Argentine pesos. panity with the US dollar in January 2002, it collapsed in value to Ps4.0/$ by October 2002. The outlook was for a further decline in the peso's value. Since both DeMagistris and Acuña wanted to continue their longtime relationship, they agreed on a risk-sharing arrangement. As long as the spot rate on the date of an invoice is between Ps3.5/$ and Ps4.5/$, DeMagistris will pay based on the spot rate. If the exchange rate falls outside this range, they will share the difference equally with Acuña Leather Goods. The risk-sharing agreement will last for six months, at which time the exchange rate limits will be reevaluated DeMagistris contracts to import leather coats from Acuña for Ps8,500,000 or $2.125,000 at the current spot rate of Ps4.0/5 during the next six months a. If the exchange rate changes immediately to Ps6.0/5, what will be the dollar cost of six months of imports to DeMagistris? b. At Ps6.0/5, what will be the peso export sales of Acuña Leather Goods to DeMagistris Fashion Company? a. If the exchange rate changes immediately to Ps6.0/5, what will be the dollar cost of six months of imports to DeMagistris (Round to the nearest dollar)

Answer 1

Between Spot Rate of Ps 3.5 / $ to Ps 4.5 /$ DeMagistris will pay Acuna Leather as per the Spot rate only.

If Exchange Rate Falls outside the exchange rate they will share the difference equally.

Now assume X is Exchange rate

Which is higher than Ps 4.5 /$

They Will Share ( X - 4.5 ) / 02 equally in each Ps / $ amount over and above 4.5   Ps / $ .

Now at the time of Agreement Import Value was Ps 8500000 or $ 2125000.

Final Spot Rate as per agreement will be ( X - 4.5 ) / 02 + 4.5 Ps / $ .

Now Exchange rate rises to Ps 6 /$

So They will Share ( 6 -4.5 )/ 02. = 0.75 Ps / $ amount over and above 4.5 Ps / $ .

Final Rate as per agrrement will be = 4.5 + 0.75 = 5.25 Ps / $

$ Payble by DeMagistris =  Ps Amount / Final Rate as per agrrement in Ps / $ = 8500000 / 5.25 = $ 16,19,047.62

Ans(a): If the exchange rate changes immediately to Ps 6 / $ Dollar cost of Six months imports will be $ 16,19,048

Peso Export Sales will be = $ Amount * Final Rate as per agreement in Ps / $ = 2125000 * 5.25 = Ps 11156250

Ans(b) : At Ps 6 / $ Expor sales of Acuna Leather to DeMagistris will be Ps 11156250