An American company imports cameras from Japan. After a shipment arrives, it mus

Question

An American company imports cameras from Japan. After a shipment arrives, it must pay in yen to the Japanese supplier within 30 days. The cost of each camera: ¥200,000. The sales price will be $2,000. The current dollar/yen spot exchange rate when signing the contract is $1 = ¥120. Question 1: The gross profit?

The American company will not be able to have to fund to pay the Japanese supplier until the cameras are sold. During the next 30 days, the exchange rate becomes $1 = ¥95. Question 2: Can American company still make profit ?

To insure or hedge against the risk, the American company want to engage in a forward exchange. Thus, it enters into a 30-day forward exchange dealer with a rate of $1 = ¥110. Question 3: Can American company make profit with this arrangement?

Explanation / Answer

1) Sale price $      2,000.00 Cost = 200000/120 = $      1,666.67 Gross profit $          333.33 2) Sale price $      2,000.00 Cost = 200000/95 = $      2,105.26 Gross profit $        -105.26 No, the American company cannot make profit. 3) Sale price $      2,000.00 Cost = 200000/110= $      1,818.18 Gross profit $          181.82 Yes, the American company can make profit with this arrangement.

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