Can you please help me with this question below and possible show the work. than
ID: 2620263 • Letter: C
Question
Can you please help me with this question below and possible show the work. thank you very much.
2-
IBM will receive 4.5 million euros from a German firm in 90 days. Meanwhile, IBM has an account payable of 2 million euros to an Italy firm in 90 days Suppose the current spot rate is $1.2680 per euro and the future spot rate in 90 days will be $1.1250 per euro. What is IBM's gain or loss in dollar term, on its transaction exposure, if IBM does not choose to hedge the exposure? $357,500 gain $357.500 loss $355,700 lossExplanation / Answer
Solution:-
Amount receivable= 4.5 million
Amount payable = 2 million
Net amount receivable= 4.5 million-2 million = 2.5 million
A) If the amount would have been received today, the amount will be received would be converted using spot rate.
Spot rate:- 1Euros=$1.2680
Hence net amount receivable= 2,500,000*$1.2680= $3,170,000.00
B) ) If the amount would have been received after 90 days, the amount will be received would be converted using 90 days spot rate.
Spot rate:- 1Euros=$1.1250
Hence net amount receivable= 2,500,000*$1.1250= $2,812,500.00
Hence the gain or loss in dollar term on its transaction exposure
= Amount receivable after 90 days- Amount receivable if amount is received today
=$2,812,500.00-$3,170,000.00
= - $357,500.00
Since the net amount receivable in 90 days is less than amount receivable,
there is the loss, hence
Loss in dollar term due to transaction exposure = $357,500.00
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