Question

Element Electronics (EE), a US company, regularly imports parts from Hitachi, a Japanese company.  EE pays in yen, and the exchange rate has been approximately ¥108/$. The companies have agreed a risk-sharing contractual arrangement to share the burden of currency risk in the future. All purchases are made by EE at the current exchange rate, as long as the spot rate on the date of invoice is between ¥105/$ and ¥110/$.  If the spot exchange rate falls outside this range, EE and Hitachi will share the difference equally.

EE has an accounts payable for ¥10,000,000 yen for the month of April. The spot exchange rate on the date of invoice is ¥103/$ (the yen has appreciated relative to the dollar). What is EE's total cost for the April payable in US dollars?

hint: given the exchange rate is in ¥/$, and you are trying to find the dollar amount, you need to divide the yen amount by the risk sharing exchange rate

round your answer to two decimals (cents)

Answer 1

The spot exchange rate on the date of invoice is ¥103/$

Thus Difference has to be shared Equally

= 50% of (Amount to be paid as per Spot Exchange Rate - Amount to be paid as per risk sharing Contractual Agreement)

= 50% of ( Amount to be paid at ¥103/$- Amount to be paid at ¥108/$)

=50% * (¥10,000,000/¥103/$ - ¥10,000,000/¥108/$)

= 50% * ( $97087.38 - $92592.59) = 50% * $4494.4 = $2247.2

EE's total cost for April Month = Amount payable as per Risk Chanring Agreement + 50% of change in Exchange rate

= $92,592.59 + 2247.2 = $94,839.79 (Approax.)