David just entered into an agreement to import AUD 665,000 of machinery parts fo

Question

David just entered into an agreement to import AUD 665,000 of machinery parts for use as spare parts in his company's U.S. factories. Today's exchange rate is AUD/USD 0.7561. David paid 10% of the purchase price today and is required to pay the remaining 90% in 120 days. Payment must be made in AUD

a. Assuming the exchange rate does not change, what amount of USD will David need to make the payment?

b. If the exchange rate changes to AUD/USD 0.6885 what amount of USD will David need to make the payment? Will David have an exchange gain or loss? If yes then how much?

c. If the exchange rate changes to AUD/USD 0.8231 what amount of USD will David need to make the payment? Will David have an exchange gain or loss? If yes, then how much?

Explanation / Answer

a) 10% has already been paid. So if the exchange rate does not change, the remaining amount in AUD is 90%*665,000 = AUD 598,500. So the amount of USD will be 598,000 * 0.7561 = $452,525.85 in USD

b) If the eschange rate is AUD / USD 0.6885, then USD required will be 598,000*0.6885 = $411,723

David will have a exchange rate gain of 452,525.85 - 411,723 = $40,802.85

c) If exchange rate is now AUD / USD 0.8231, then amount of USD that would have been paid is 598,000*0.8231 = $492,213.8. Here DAvid would suffer a loss of 492,213.8 - 452,525.85 = $39,687.95

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