Assume you manage a firm that faces transaction exposure. Your company manufactures and sells tricycles around the world
You have just completed a large sale of tricycles to a chain of stores in Sweden and received a promised payment of 375 krona per tricycle. You have already sold 3,000 tricycles and are now awaiting payment which you expect to receive in 90 days. The exchange rate today is 7.5 krona per dollar. Over the next ninety days, the indirect exchange rate unexpectedly moves from 7.5 to 7.7. What is the fall in domestic revenue due to this unexpected move in the exchange rate?
A) $389
B) $1289
C) $2896
D) $3896
Answer: D
Explanation: D) 3,000 tricycles at 375 krona per tricycle = 1,125,000 kronas is your sales receipt. At today's exchange rate, these kronas will convert to = $150,000. At the indirect exchange rate, these kronas will convert to = $146,104. That is a difference of $150,000 - $146,104 = $3,896.
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