Onni, a Finnish national, has just signed an agreement to purchase $209,000 of s
ID: 2785678 • Letter: O
Question
Onni, a Finnish national, has just signed an agreement to purchase $209,000 of specialty retail products from the US to be sold in his stores in Finland. The products are to be shipped within the next 20 days and payment is required in 60 days. The current exchange rate is EUR/USD 1.0861.
a. Assuming the exchange rate does not change, what amount of EUR will Onni need to make the payment?
b. If the exchange rate changes to EUR/USD 1.1132, what amount of ERU will Onni need to make the payment? Will Onni have an exchange gain or loss? If yes, then how much (in Euros)?
c. If the exchange rate changes to EUR/USD 1.0428, what amount of EUR will Onni need to make the payment? Will Onni have an exchange gain or loss? If yes, then how much (in Euros)?
Explanation / Answer
Purchase price is $209,000
a) If the exchange rate does not change, Since 1 euro = 1.0861 USD, amount of Euro that needs to be paid = 209000/1.0861 = EURO 192,431.6
b) If the exchange rate changes to 1 Euro = 1.1132 USD, then euro that needs to be paid = 209000/1.1132 = euro 187,747 and thus there would have been GAIN of 192,431.6 - 187,747 = euro 4,684.6
c) If the exchange rate is 1 euro = 1.0428 USD, then euro that needs to be paid = 209000/1.0428 = euro 200,421.9 and thus there is a LOSS of 200,421.9 - 192,431.6 = euro 7,990.3
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