Question

Acuña Leather Goods. DeMagistris Fashion Company, based in New York City, imports leather coats from Acuña Leather Goods, a reliable and longtime supplier, based in Buenos Aires, Argentina. Payment is in Argentine pesos. When the peso lost its parity with the U.S. dollar in January 2002, it collapsed in value to Ps4.0/$ by October 2002. The outlook was for a further decline in the peso's value. Since both DeMagistris and Acuña wanted to continue their longtime relationship, they agreed on a risk-sharing arrangement. As long as the spot rate on the date of an invoice is between Ps3.5/$ and Ps4.5/$, DeMagistris will pay based on the spot rate. If the exchange rate falls outside this range, they will share the difference equally with Acuña Leather Goods. The risk-sharing agreement will last for six months, at which time the exchange rate limits will be reevaluated. DeMagistris contracts to import leather coats from Acuña for Ps9,000,000 or $2,250,000 at the current spot rate of Ps4.0/$ during the next six months. a. If the exchange rate changes immediately to Ps6.0/$, what will be the dollar cost of six months of imports to DeMagistris? b. At Ps6.0/$, what will be the peso export sales of Acuña Leather Goods to DeMagistris Fashion Company? a. If the exchange rate changes immediately to Ps6.0/$, what will be the dollar cost of six months of imports to De Magistris? $ (Round to the nearest dollar.) b. At Ps6.0/$, what will be the peso export sales of Acuña Leather Goods to De Magistris Fashion Company? Ps (Round to the nearest Argentine peso.)

Answer 1

Outer limit, L = 4.5

Excess = E = 6 - 4.5 = 1.5

DeMagistris share = E / 2 = 1.5/2 = 0.75

Exchange rate for DeMagistris = 4.5 + 0.75 = 5.25

Part (a)

The dollar cost to DeMagistris = 9,000,000 / 5.25 = $ 1,714,286

Part (b)

Peso export sales = Ps 9,000,000