Question

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 Ps7 comma 000 comma 000 or $ 1 comma 750 comma 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?

Answer 1

Answer:

$1,333,333.33

Explanation:

Exchange rates (Ps/$)3.50 4.50

New exchange rate (Ps/$)6.00

Less Exchange rate allowable (Ps/$)4.50

= (Ps/$)1.50

Shares of De Magistris' 0.75

Shares of Acuña's..0.75

Top of range 4.50

Add Share 0.75

=5.25

Let Assumed hat 6 months of imports will still be (Ps) $7,000,000

÷ Exchange rate for DeMagistris (Ps/$)5.25

= $1,333,333.33