Assume you manage a firm that faces transaction exposure. Your company manufactures and sells automobile parts around the world
You have just completed a large sale of parts to an auto manufacturer in France and received a promised payment of €172 per part. You have already sold 17,000 parts and are now awaiting payment which you expect 90 days from today. The exchange rate today is $1.25/€. Over the next ninety days, the direct exchange rate unexpectedly moves from $1.25/€ to $1.30/€. What is the gain in domestic revenue due to this unexpected move in the exchange rate?
A) $106,000
B) $114,900
C) $118,500
D) $146,200
Answer: D
Explanation: D) 17,000 parts at €172 per part = €2,924,000.
$1.30/€ - $1.25/€ = $.05/€ × €2,924,000 = $146,200
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