Question

Ford purchased electric motors from Nidec (Japanese company) and was billed ¥200 million payable in three months. Two companies agree to share the currency risks. In the Price Adjustment Clause, the neutral zone is ¥115.38/$ - ¥129.42/$, the base rate is ¥122.4/$ and both parties will share the currency risk beyond a neutral zone.
How much each party have to pay/receive if the exchange rate is ¥117.21/$s

How much each party have to pay/receive if the exchange rate is ¥132.12/$

a.   Ford pay ¥202.01 million; Nidec receives $1.529 million.

b.   Ford pays $1.529 million; Nidec received ¥202.01 million.

c.   Ford pay ¥213.51 million; Nidec receives $1.616 million.

d.   Ford pay $1.616 million; Nidec receives ¥213.51 million.

Answer 1

Assuming base rate of 122.4 is the currency exchange rate at the time of deal,

Payable= 200 million Yen or 200/122.4 = 1.63 mio dollars

Now, the currency rate is 117.21,

Payable/Receivable = 200 milion yen = 200/117.21 = 1.71 mio dollars.

If currency is 132.12 (Beyond the neutral zone)

Payable = 200/132.12 = 1.51 mio dollars

Currency risk= 200 - (200/132.12*129.42)= 4.08 mio yen (Currensy risk is calculated from the extreme value of neutral set)

hence Nidec receives = 200 +4.08/2 = 202.04 mio Yen

Ford Pays = 200/132.12 + 4.08/132.12/2= 1.529 mio dollars

Hence, correct answer is option(b)