Question

Suppose that a US-based company is buying Chinese goods. Current exchange rate for Chinese Yuan is 0.15 USD. The price of goods is ¥13,000 per unit. The company is buying 800 units per year with a fixed contract for the next two years. Suppose that Chinese Yuan appreciate to 0.2 USD in the next year. The US importer will respond to this by lowering the demand to 600 units in the third year.

a) What cash flow will be reflected on the balance of payments at the end of the first year?

b) What cash flow will be reflected on the balance of payments at the end of the second year?

c) What cash flow will be reflected on the balance of payments at the end of the third year?

Answer 1

• Current exchange rate Yuan to USD is 0.15 USD
• Next year appreciate to 0.2 USD

First year, purchased unit quantity will be- 800 units @13000 Yuan/unit

Second year, purchased unit quantity will be -800 units @13000 Yuan/unit

Third year , purchased unit quantity will be - 600 units @13000 Yuan/unit

First year , Cash flow on the balance of payment will be = 800*13000*0.15= 15,60,000 USD

Second year, cash flow on the balance of payment will be = 800*13000*0.20 = 20,80,000 USD

Third year , cash flow on the balance of payment will be = 600*13000*0.20 = 15,60,000 USD