Dell is selling 30,000 units in Europe at an average price of €1,500 per unit. Both the spot and forward exchange rates are $1.20/€. The cost of each unit in dollars is $1,300 per unit. The elasticity of demand for Dell computers in Europe is ε = 1.5.Now consider a depreciation of Euro (relative to US Dollar) from $1.20/ euro to $1.08/euro.
What is the exposure for Dell's dollar profit when passthrough =0.8?
A) 25.75 Euro
B) 71.69 Euro
C) 32.19 Euro
D) 26.09 Euro
Solution:
Calculation of the Delta for Dell's Dollar Profit Assuming Zero Passthrough:
Old | New | % Change | |
Spot ($/€) | 1.20 | 1.08 | -10.00% |
Price (€) | 1,500 | 1,500 | 0.00% |
Price ($) | 1,800 | 1,620 | -10.00% |
Cost ($) | 1,300 | 1,300 | 0.00% |
Volume | 30,000 | 30,000 | 0.00% |
Revenue ($) | 120 Million | 108 Million | -10.00% |
Costs ($) | 100 Million | 100 Million | 0.00% |
Profts ($) | 20 Million | 8 Million | -60.00% |
Profts (€) | 16.7 Million | 7.4 Million | -55.69% |
Therefore, the Delta for Dell’s dollar profits is 6.0 Million.
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