Question

Suppose that Nevada Co., a US-based MNC, makes regular, monthly purchases of materials from a German supplier named Spicurity. These regular payments are typically in the amount of 300,000 euros. Last month the exchange rate was $1.93 per euro. Nevada Co. only has cash reserves in dollars, while Spicurity only has cash reserves in euros. Suppose both companies use the same bank.
In order to conduct this transaction last month, Nevada Co.
Required:
a. $_____ to pay for the materials. Thus, the bank handling the transaction reduced Nevada’s account by this amount, denominated in
b. __________( euros OR dollars). The bank then converted this amount to c. ___________ d. ________________( euros OR dollars). and credited it to Spicurity’s account.

Answer 1

Answer:

In order to conduct this transaction last month, Nevada Co.

Required:

a. $_579,000____ to pay for the materials. Thus, the bank handling the transaction reduced Nevada’s account by this amount, denominated in

b. __dollars___( euros OR dollars). The bank then converted this amount to c. ___euros________ from d. ______dollars_____( euros OR dollars). and credited it to Spicurity’s account.

Explanation:

a) Data and Calculations:

Importer = Nevada Co., a US-based MNC

Exporter = Spicurity, a German supplier

Amount of regular payments = 300,000 euros

Exchange rate = $1.93 per euro

Amount in dollars = $579,000 (300,000 euros * $1.93)

b) To convert to dollars from euro, when the exchange rate is $1.93 per euro, we multiply the euro-based amount by the exchange rate.  To convert the dollars to the euro, we divide by the exchange rate.  To multiply or divide depends on which currency has a higher value (e.g. euro vs dollars).