Ralf and Polo Co is an international fashion firm which has the operation office center in Derby UK. It produces international brand T-shirt that market all over the world. Ralf and Polo rely on its long-life cotton supplier Mahorta Inc. from Calcutta-India. The MOU between Ralf and Polo and Mahorta states Ralf and Polo should make its payment in Indian Rupee (IRP). In early 2000 there was a massive devaluation of IRP to IRP11.25/£. Market outlook sees that unfavorable movement of IRP, more depreciation of IRP value is expected. To protect this volatile movement, both exporter and importer agreed to sign a one-year currency risk-sharing agreement that allow the movement of the exchange rate within the range of IRP11.25/£ and IRP12.25/£. The agreement stated that when the exchange rate falls out of the range on the date of invoices, then both parties will share the difference uniformly.

Furthermore, they also agreed this agreement will effectively be valid only for one year, after that period then it can be renegotiated. During the following year the Ralf and Polo agreed to import cotton yarn from Mahorta Calcutta for IRP 11,5000,000 or £1,000,000 at the current spot rate IRP11.5/£ during one year

1. 1) What happens to the exporter and importer if the exchange rate goes to IRP12.5XY/£, how much the import cost for Ralf and Polo for one year?  
2. 2) How much would be the net sales of Mahorta to Ralf and Polo if the exchange rate IRP 13.XY/£

Answer rating: 100% (QA)

If the exchange rate goes to IRP125 the cost of importing for Ralf and Polo would increase as per th... View the full answer