Question

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QUESTION 13 (5 minutes) LO7c) Foreign Exchange 5 MARKS You are the manager of the Sky City Convention Centre. The International Economics Association has contacted you with the following proposal. They want to hire the convention centre in February 2017 and are willing to pay a maximum of US$275 000. The minimum that you can accept is NZ$355 000. Answer the following questions a) What does the NZ exchange rate need to be for you to accept the Association offer? 1 mark) b) If the NZS to USs exchange rate is 0.785 will lou accep o reject the International Economics Association offer. State the profit or loss (in NZS); (2 marks) If the Conference is held at the Sky City Convention Centre, in which Balance of Payments Current Account sub-account ill it be recorded in (1 mark) and will it be recorded as a debit or a credit (1 mark). A very brief explanation is required. Note: the mark is awarded on the basis of the explanation. o) 2 marks)

Answer 1

a) The NZ value is $1.47 compared to the U.S $1 value. So, the minimum accepts as per the NZ value is $355,000. It means in terms of U.S value $241,496.60

The difference of what they have offered maximum value in U.S dollars and what I offered in Newzeland dollars changed to U.S value –

=$275,000 - $241,496.60

=$33,503.40

If they offered the maximum value of U.S $275,000 then as a manager of the Sky City Convention Center so I will accept the offer due to I got more than expected in NZ$355,000 income of profit in the U.S $33,503.40

b) Normally, the NZ$ to US$ exchange rate is $0.68 approximately. In case, if it is increased to exchange rate value for $0.785 so I will ready to accept the International Economic association offers. Because the value is increased to $0.105($0.785 - $0.68) and it is profit for NewZeland in dollars(NZ$).

c) The profit from abroad will be recorded as sub-account of Income Receipts & Payments under Current Account. It will be posted on Credits side Income Receipts and recorded as Net Credits (Credit – Debit) as Net Income Receipts(If there are any payments so it will be deducted from Incomes and show the transaction in Net Credits section).