Question

Acuña Leather Goods.  DeMagistris Fashion​ Company, based in New York​ City, imports leather coats from​ AcuñaLeather​ Goods, a reliable and longtime​ supplier, based in Buenos​ Aires, Argentina. Payment is in Argentine pesos. When the peso lost its parity with the U.S. dollar in January​ 2002, it collapsed in value to Ps4.0/$ by October 2002. The outlook was for a further decline in the​ peso's value. Since both DeMagistris and​ Acuña wanted to continue their longtime​ relationship, they agreed on a​ risk-sharing arrangement. As long as the spot rate on the date of an invoice is between​ Ps3.5/$ and​ Ps4.5/$, DeMagistris will pay based on the spot rate. If the exchange rate falls outside this​range, they will share the difference equally with​ Acuña Leather Goods. The​ risk-sharing agreement will last for six​months, at which time the exchange rate limits will be reevaluated. DeMagistris contracts to import leather coats from​Acuña for

Ps8,000,000 or $ 2,000,000 at the current spot rate of Ps4.0​/$ during the next six months.

a. If the exchange rate changes immediately to Ps6.0​/$, what will be the dollar cost of six months of imports to​ DeMagistris?

​$_____ ​(Round to the nearest​ dollar.)

b. At Ps6.0​/$, what will be the peso export sales of​ Acuña Leather Goods to DeMagistris Fashion​ Company?

Ps_______ ​(Round to the nearest Argentine​ peso.)

Answer 1

a.
We would first calculate the effective interest rate applicable for both import and export
Allowable exchange rate	Ps3.5/$ to Ps4.5/$
Current exchange rate	6.00
Maximum allowable exchange rate	4.50
Difference in exchange rate	1.50
D's share	0.75	1.50*50%
A's share	0.75	1.50*50%
Thus, effective exchange rate
Top allowance range	4.50
Sharing rate	0.75
Effective exchange rate	5.25
Cost of import	8000000/5.25
Cost of import	$1,523,809.52
Thus, cost of import for D would be $1,523,810
b.
Acuna leather goods export sales would continue to be Ps8,000,000