Question: Ersatz Bread Ltd (hereafter EB) enters into a contract to buy sawdust from the US. It will need to pay USD 353 in one year.

Ersatz Bread Ltd (hereafter EB) enters into a contract to buy sawdust from the US. It will need to pay USD 353 in one year. EB is concerned the exchange rate might change. It enters into a risk sharing arangemen with the sawdust factory. They set a AUD/USD base rate of 1.07. There is a neutral zone of 0.963 to 1.177. Ouside of the neutral zone, the parties split the exchange rate change equally. Suppose the final exchange rate is 1.3375, what must EB pay?

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