Assume you manage a firm that faces transaction exposure. Your company manufactures and sells bicycles around the world
You have just completed a large sale of bicycles to a chain of stores in Australia and received a promised payment of 250 AUD per tricycle. You have already sold 6,000 bicycles and are now awaiting payment which you expect to receive in 90 days. The exchange rate today is 1.25 AUD per USD. Over the next ninety days, the indirect exchange rate unexpectedly moves from 1.25 AUD to 1.22 AUD. What is the increase in domestic revenue due to this unexpected move in the exchange rate?
A) $38,239
B) $12,589
C) $29,508
D) $38,496
Answer: C
Explanation: C) 6,000 bicycles at 250 AUD per bicycle = 1,500,000 AUD is your sales receipt. At today's exchange rate, these AUD will convert to 1,500,000/1.25 = $1,200,000. At the new indirect exchange rate, these AUD will convert to 1,500,000/1.22 = $1,229,508, a difference of $29,508.
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