A risk-sharing agreement between a Swiss watch manufacturer and a U.S. retailer

Question

A risk-sharing agreement between a Swiss watch manufacturer and a U.S. retailer sets the boundaries of the $/Sfr exchange rate used in transactions between them at 0.75 - 0.85. Any deviations in spot rate from this range are to be shared equally between the two parties. If the U.S. retailer stands to pay a Sfr1,000,000 invoice when the spot rate is 0.90, how much does the company benefit from the existence of the risk-sharing agreement?

There will be no benefits under this scenario.

$25,000.

$50,000.

$200,000.

There will be no benefits under this scenario.

$25,000.

$50,000.

$200,000.

Explanation / Answer

gain = (0.90-0.85)*1000000 = 0.05*10^6 = $50,000

SO OPTION C

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