14. Reese Co. will pay 1 million British pounds for materials imported from the

Question

14. Reese Co. will pay 1 million British pounds for materials imported from the U.K. in one month. Reese Co. sells some goods to Poland, and will receive 3 million zloty (the Polish currency) for those goods in one month. The spot rate of the pound is $1.50, while the spot rate of the zloty is about $.30. Assume that the pound and zloty are both expected to depreciate substantially against the dollar over the next month and by the same degree (percentage). Will this have a favorable effect, unfavorable effect or no effect on Reese Co. over the next year? Explain.

Explanation / Answer

Cash flow from payment=1000000*1.50=1500000 Cash flow to be receive= 3000000*.30=900000 Here, Doller value of outflow to pound is more then the inflow of Zloty.If both co. Will depreciated then Reese co. Will be in benifit because the favorable effect on the outflows should exceed the unfavorable effect on the inflows.

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