Question 1 (this question has 3 subparts, a, b and c - see below) a contract on
ID: 426204 • Letter: Q
Question
Question 1 (this question has 3 subparts, a, b and c - see below)
a contract on August 1 with a delivery triggered adjustment clause of a base exchange rate +/- 5%
Question 1 (this question has 3 subparts, a, b and c - see below)
On August 1, John Deere, A US company signed a 330,000 yen contract with Yamaguchi Engineering, a Japanese company for 3 machines to be delivered on September 15, October 15, and November 15 (three equal installments of 110,000 yen each). A currency adjustment clause is written into the contract establishing a Base Exchange rate of 100 yen per dollar +/- 5%. The actual exchange rates on September 15, October 15 and November 15 are as under: September 15: 1 $ = 91 yen October 15: 1 $ = 98 yen November 15: 1 $ = 100 yen 1a) How much money, in US dollars, does John Deere have to pay on September 15, October 15 and November 15 to Yamaguchi Engineering assuming that both parties signeda contract on August 1 with a delivery triggered adjustment clause of a base exchange rate +/- 5%
1b) What is the savings in US dollars that John Deere earned by including a delivery triggered adjustment clause of a base exchange rate +/- 5%, compared to the base case of not having a delivery triggered adjustment clause included in the contract? 1c) What is an alternative that John Deere can consider to obtain even more savings compared to the savings that you calculated in part 1b aboveExplanation / Answer
1a. Considering both parties signed, the contract pricing is between 95-105 yen for a dollar. That is if the exchange rate is within this range, exact price would be used. If it goes above the range, 105 would be used, if it goes below 95, then 95 yen for a dollar would be used.
Calculating money in US dollars=
September 15- 91 yen=1 dollar; so exchange rate is 95 yen= 1$ for the deal; hence he pays=
110,000/95 = 1157.89 dollars
October 15- 98 yen = 1 dollar; so exchange rate is 98 yen=1 $; hence he pays= 110,000/98 = 1122.44
November 15- 100 yen=1 dollar; so exchange rate is 100 yen= 1 $; hence he pays= 110,000/100 = 1100 dollars
Total dollars paid = 1100 + 1122.44 + 1157.89 = 3380.33 dollars
Ques 1b.
If he had not signed the agreement; the amount he would have paid is-
September 15- 91 yen=1$; total paid= 110,000/91 = 1208.79
October 15- 98 yen=1$; total paid= 110,000/98= 1122.44
November 15- 100 yen=1 $; total paid= 110,000/100= 1100
Total amount paid in dollars= 1100 + 1122.44 + 1208.79 = 3431.23
Therefore, savings= 3431.23- 3380.33 = 50.9 dollars
Ques 1c.
More savings could be obtanied by-
1. Keeping the exhange rate fixed at 100; that way you could save more, even if dollar weakens againts yen and we get lesser yens for a dollar
2. Lowering the range to +- 3% instead of 5 can also be done.
If you have any queries regarding the answer, or want some elaborations, or clarifications on any concepts used; please post in the comments; i would be glad to help you at the earliest. Thank You
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