Question

Ford purchased electric motors from Nidec (Japanese company) and was billed ¥200 million payable in three months. Two companies agree to share the currency risks. In the Price Adjustment Clause, the neutral zone is ¥115.38/$ - ¥129.42/$, the base rate is ¥122.4/$ and both parties will share the currency risk beyond a neutral zone.

How much each party have to pay/receive if the exchange rate is ¥117.21/$

a. Ford pays ¥200 million; Nidec received $1.706 million.

b. Ford pays $1.706 million; Nidec receives ¥200 million.

c. Ford pay ¥200 million; Nidec received $1.634 million.

d. Ford pays $1.634 million; Nidec received ¥200 million.

Answer 1

In the Price Adjustment Clause, the neutral zone is ¥115.38/$ - ¥129.42/$ , which indicate both parties will share the loss/profit beyond the specified limit.

At time of payment exchange rate is ¥117.21/$ ,

Payment billed = ¥200 million

Payment Billed in ($) = 200 * 1/117.21 = $ 1.706 millions

so, Ford will pay $ 1.706 million and Nidec will receive ¥200 million

b. Ford pays $1.706 million; Nidec received ¥200 million.