Question

13.05

Currency Exchange Rates

Custom Shutters, Inc., manufactures plantation shutters according to customer order. The company has a reputation for producing excellent quality shutters that fit virtually any size or shape of window. Sales are made in all 50 states. On July 1, Custom Shutters received orders from contractors in Switzerland and Japan. Lee Mills, president and co-owner of Custom Shutters, was delighted. The Swiss order is for shutters priced at $64,000. The order is due in Geneva on September 1, with payment due in full on October 1. The Japanese order is for shutters priced at $124,000. It is due in Tokyo on August 1, with payment due in full on October 1. Both orders are to be paid in the customer’s currency. The Swiss customer has a reputation in the industry for late payment, and it could take as long as 6 months. Lee has never received payment in foreign currency before. He had his accountant prepare the following table of exchange rates:

	Exchange Rate for $1
	Swiss Franc			Yen
Spot rate		1.2360			117.70
30-Day forward rate		1.2450			117.68
90-Day forward rate		1.2590			117.70
180-Day forward rate		1.2708			117.66

Required:
Round your answers to the nearest dollar.

1. If the price of the shutters is set using the spot rate as of July 1, how many francs does Lee expect to receive on October 1? How many yen does he expect on October 1?
Swiss order Swiss francs
Japanese order yen

2. Using the number of francs and yen calculated in Requirement 1, how many dollars does Lee expect to receive on October 1? Assume on-time payment and the 90-day forward rate holds.
$

Will he receive that much?
The amount that Lee will receive depends on the exchange rates in effect on (Pick One: July 1, Aug 1, Sept. 1, October 1).

Answer 1

1.
Amount which Custom Shutters Inc., would receive if the price is set using spot rate as
of July 1
	Switzerland Contract	Japan Contract
Value in $	64,000	124,000
Spot rate on July 1	1.236	117.70
Value in Foreign Curr	79,104	14,594,800
2.
Amount which Custom Shutters Inc., would receive if 90 days forward rate holds
	Switzerland Contract	Japan Contract
Value in Foreign Curr	79,104	14,594,800
90 day forward rate	1.259	117.70
Amount received in $	62,831	124,000
Custom Shutters Inc., would receive $ 62,831 on Switzerland Contract
Custom Shutters Inc., would receive $ 124,000 on Japan Contract
3.
The amount that Lee would receive would depend on the spot rate as on Oct 1