Question

What would be Ford’s costs for March at a spot rate of Won1,000/$ without the risk-sharing agreement? A) $1,000 B) $1,200 C) $10,000 D) $11,500 Use the following to answer questions 18-19: If Ford’s Asian operations import automotive parts from Hyundai (Korea) every month, year after year, major swings in exchange rates can benefit one party at the expense of the other. One potential solution would be for Ford and Hyundai to agree that all purchase by Ford will be made in Korean won at the current exchange rate, as long as the spot rate on the data of invoice is between, say, Won1,100/$ and Won1,200/$. If the exchange rate is between these values on the payment dates, Ford agrees to accept whatever transaction exposure exists. If, however, the exchange rate falls outside this range on the payment date, Ford and Hyundai will share the difference equally. Ford has an account payable of Won1,000,000 for the month of March. The spot rate on the date of invoice is Won1,000/$.

Answer 1

Ford's cost without the risk sharing agreement = Account payable / Current spot rate = 1,000,000 / 1,000 = $ 1,000

Hence, the correct answer is the first option A) $ 1,000