Consider the following illustrative exchange rates.

U.S Dollars Required to Buy

1 Unit of Foreign Currency

EURO..........1.2500

Swedish krona......0.1481

(1) Are these currency prices direct quotations or indirect quotations?

(2) Calculate the indirect quotations for euros and kronor (the plural of krona is kronor).

(3) What is a cross rate? Calculate the two cross rates between euros and kronor.

(4) Assume Citrus Products can produce a liter of orange juice and ship it to Spain for $1.75. If the firm wants a 50% markup on the product, what should the orange juice sell for in Spain?

(5) Now, assume Citrus Products begins producing the same liter of orange juice in Spain. The product costs 2.0 euros to produce and ship to Sweden, where it can be sold for 20 kronor. What is the dollar profit on the sale?

(6) What is exchange rate risk?

Citrus Products Inc. is a medium-sized producer of citrus juice drinks with groves in Indian River County, Florida. Until now, the company has confined its operations and sales to the United States, but its CEO, George Gaynor, wants to expand into Europe. The first step would be to set up sales subsidiaries in Spain and Sweden, then to set up a production plant in Spain, and, finally, to distribute the product throughout the European common market. The firm’s financial manager, Ruth Schmidt, is enthusiastic about the plan, but she is worried about the implications of the foreign expansion on the firm’s financial management process. She has asked you, the firm’s most recently hired financial analyst, to develop a 1 -hour tutorial package that explains the basics of multinational financial management. The tutorial will be presented at the next board of directors’ meeting. To get you started, Schmidt has supplied you with the following list of questions: