Question

Burton Manufacturing. Jason Stedman is the director of finance for Burton Manufacturing, a U.S.-based manufacturer of handheld computer systems for inventory management. Burton's system combines a low-cost active tag that is attached to inventory items (the tag emits an extremely low-grade radio frequency) with custom designed hardware and software that tracks the low-grade emissions for inventory control. Burton has completed the sale of an inventory management system to a British firm, Pegg Metropolitan (UK), for a total payment of £1,200,000. The exchange rates shown in the popup window, were available to Burton on the dates shown, corresponding to the events of this specific export sale. Assume each month is 30 days. a. What will be the amount of foreign exchange gain (loss) upon settlement? b. If Jason hedges the exposure with a forward contract, what will be the net foreign exchange gain (loss) on settlement? Event Price quotation for Pegg Contract signed for sale Contract amount, pounds Product shipped to Pegg Product received by Pegg Pegg makes payment Date Spot Rate (SI) Forward Rate (SIDays ForwardE 210 180 February 1 March 1 1.7943 1.7318 E1,200,000 1.7649 1.7944 1.7112 1.7869 1.7234 June 1 August 1 September 1 Click on the icon located on the top-right comer of the data table in order to copy its contents into a spreadsheet 1.7560 1.7909 90 30

Answer 1

Part (a)

Receivables will be booked on June 1 when product is shipped. Spot rate then was 1.7649.

Settlement was done on September 1. Spot rate was 1.7112

Hence, FX gain / (loss) = (Spot rate on September 1 - spot rate on June 1) x Amount = (1.7112 - 1.7649) x 1,200,000 = - $ 64,440

Hence, there is a loss of $ 64,440.

Part (b)

FX gain / (loss) = (Forward rate on June 1 - spot rate on June 1) x Amount = (1.7560 - 1.7649) x 1,200,000 = - $ 10,680

Hence, there is a loss of $ 10,680