Safe Seats Inc., a US based baby car seat supplier, imports car seats from Lazad

Question

Safe Seats Inc., a US based baby car seat supplier, imports car seats from Lazada Baby Products, a Malaysian supplier, based in Kuala Lumpur. They have had a mutually beneficial long term relationship with each other. Recently, the Malaysian ringgits has fluctuated widely between MYR3.25/$ to MYR4.50/$. Since both the companies wanted to continue their longtime relationship, they have agreed to a risk-sharing arrangement. As long as the spot rate on the date of an invoice is between MYR3.25/$ to MYR4.50/$, Safe Seats will pay based on the spot rate. If the spot rate falls outside this range, they will share the difference equally. This agreement is valid for the next 9 months, at which time they will re-evaluate it. Safe Seat has recently placed an order to import car seats from Lazada for MYR 4,000,000 and the current spot rate of MYR4/$.

If there was no risk-sharing agreement, what would be Safe Seat Cost?

Question 30 options:

$1,000,000

$800,000

$727,273

$725,000

$1,000,000

$800,000

$727,273

$725,000

Explanation / Answer

If there was no risk-sharing agreement, Safe Seat Cost would be = MYR Cost / Current Spot rate

= MYR 4,000,000 / MYR4/$

= $1,000,000

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