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 ¥111.42/$?

a. Ford pays ¥200 million; Nidec receives $1.634 million.

b. Ford pays $1.634 million; Nidec receives ¥200 million.

c. Ford pays ¥196.55 million; Nidec receives $1.764 million.

d. Ford pays $1.764 million; Nidec received ¥196.55 million.

Answer 1

In the Price Adjustment Clause, the neutral zone is ¥115.38/$ - ¥129.42/$ , which indicate both parties will share the loss/profit beyond the specified limit.

At time of payment exchange rate is ¥111.42/$ , which is below than the neutral zone

So, profit/loss from base exchange rate will share with both party ,

Change from Base rate = ¥122.4/$ - ¥111.42/$ = ¥10.98/$

% change = ¥10.98/$ / 122.4  =  0.0897

Share with both party = 0.0897 / 2 = 0.04485

Payment billed = ¥196.55

Payment Billed in ($) = 196.55 * 1/111.42 = $ 1.764 millions

so, Ford will pay $ 1.764 million and Nidec will receive ¥196.55 million

d. Ford pays $1.764 million; Nidec received ¥196.55 million.