Question

Boisjoly Watch Imports has agreed to purchase 18,000 Swiss watches for 1 million francs at today's spot rate. The firm's financial manager, James Desreumaux, has noted the following current spot and forward rates:

	U.S. Dollar/Franc	Franc/U.S. Dollar
Spot	1.6510	0.6057
30-day forward	1.6500	0.6061
90-day forward	1.6460	0.6075
180-day forward	1.6380	0.6105

On the same day, Desreumaux agrees to purchase 18,000 more watches in 3 months at the same price of 1 million Swiss francs.

What is the price of the watches, in U.S. dollars, if purchased at today's spot rate? Round your answer to the nearest dollar.
$  

What is the cost, in dollars, of the second 18,000 batch if payment is made in 90 days and the spot rate at that time equals today's 90-day forward rate? Round your answer to the nearest dollar.
$  

If the exchange rate for is 0.45 Swiss francs per dollar in 90 days, how much will Desreumaux have to pay (in dollars) for the watches? Round your answer to the nearest dollar.

Answer 1

Soln : Total value of 18000 swiss watches = 1 million francs

Also, spot rate given as USD/Franc = 1.6510

1 million francs at spot rate = 1*1.6510 = $1.6510 million or we can say that $91.72 per watch is the cost.

In case if the payment is made in $ after 90 days of 1 million francs, it will be = 1*90 day forward rate = 1*1.6460 million = $1.6460 million to pay.

Now , in case if 1 USD = 0.45 francs

in that case 1 million francs = USD 1million * 1/0.45 = $2.22 million has to be paid by the Desreumaux in dollars.