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/$, Safe Seats will pay based on the spot rate. If the spot rate falls outside this range, they will share the difference equally. This agreement is valid for the next 9 months, at which time they will re-evaluate it. Safe Seat has recently placed an order to import car seats from Lazada for MYR 4,000,000 and the current spot rate of MYR4/$.

With the risk-sharing agreement, what is the gain or loss for Safe Seat?

Question 31 options:

gain of $200,000

Loss of $200,000

gain of $272,727

Loss of $272,727

gain of $200,000

Loss of $200,000

gain of $272,727

Loss of $272,727

Explanation / Answer

In the Current scenario when the current spot rate is MYR4/$ Lazada is having a gain of $200,000 as it is currently paying MYR 4000000 and it is saving 0.5/$ (4.5 - 4) on MYR 400000.

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