Question: 10. Risk-Sharing at Harley Davidson. Harley-Davidson (U.S.) reportedly uses risk-sharing agreements with its own foreign subsidiaries and with independent foreign distributors. Because these foreign units

10. Risk-Sharing at Harley Davidson. Harley-Davidson (U.S.) reportedly uses risk-sharing agreements with its own foreign subsidiaries and with independent foreign distributors. Because these foreign units typ- ically sell to their local markets and earn local cur- rency, Harley would like to ease their individual currency exposure problems by allowing them to pay for merchandise from Harley (US) in their local functional currency. The spot rate between the US. dollar and the Australian dollar on January 1 is A$1.2823/US$. Assume that Harley uses this rate as the basis for setting its central rate or base exchange rate for the year at A$1.2800/US$. Harley agrees to price all con- tracts to Australian distributors at this exact exchange rate as long as the current spot rate on the order date is within +2.5% of this rate. If the spot rate falls outside of this range, but is still within +5% of the central rate, Harley will "share" equally (that is, "50/50") the difference between the new spot rate and the neutral boundary with the distributor.

a. What are the specific exchange rates at the boundaries of the neutral and risk-sharing zones?

b. If Harley (U.S.) ships a motorcycle, a "hog," with an invoice of $8,500 to Australia, and the exchange rate on the order date is A$1.3442/US$, what is the price in Australian dollars?

c. If Harley (U.S.) ships the same hog to Australia, and the exchange rate on the order date is A$1.2442/US$, what is the price in Australian dollars to the foreign distributor?

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