Manitowoc Crane $($U$.$S$.)$ exports heavy crane equipment to several Chinese dock facilities. Sales are currently $10,000$ units per year at the yuan equivalent of $$24,000$ each. The Chinese yuan $($renminbi$)$ has been trading at Yuan$8\mathrm{.}20/$$$,$ but a Hong Kong advisory service predicts the renminbi will drop in value next week to Yuan$9\mathrm{.}00/$$$,$ after which it will remain unchanged for at least a decade. Accepting this forecast as given, Manitowoc Crane faces a pricing decision in the face of the impending devaluation. It may either $(1)$ maintain the same yuan price and in effect sell for fewer dollars, in which case Chinese volume will not change; or $(2)$ maintain the same dollar price, raise the yuan price in China to offset the devaluation, and experience a $10\%$ drop in unit volume. Direct costs are $75\%$ of the U$.$S$.$ sales price.

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a$.$ What would be the short$-$run $($one year$)$ impact of each pricing strategy?

b$.$ Which do you recommend?

$(6$points$)$

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MacLoren Automtive manufactures British sports cars, a number of which are exported to New Zealand for payment in pounds sterling. The distributor sells the sports cars in New Zealand for New Zealand dollars. The New Zealand distributor is unable to carry all of the foreign exchange risk, and would not sell MacLoren models unless MacLoren could share some of the foreign exchange risk. MacLoren has agreed that sales for a given model year will initially be priced at a $$base$$ spot rate between the New Zealand dollar and pound sterling set to be the spot mid$-$rate at the beginning of that model year. As long as the actual exchange rate is within that base rate, payment will be made in pounds sterling. That is$,$ the New Zealand distributor assumes all foreign exchange risk. However if the spot rate at time of shipment falls outside of this range, MacLoren will share equally $($i$.$e$.,50/50)$ the difference between the actual spot rate and the base rate. For the current model year the base rate is NZ$$1\mathrm{.}6400/.$

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a$.$ What are the outside ranges within which the New Zealand importer must pay at the then current spot rate assuming a $5\%$ rate band?

b$.$ If MacLoren ships $10$ sports cars to the New Zealand distributor at a time when the spot exchange rate is NZ$$1\mathrm{.}7000/,$ and each car has an invoice cost $32,000,$ what will be the cost to the distributor in New Zealand dollars? How many pounds will MacLoren receive, and how does this compare with McLaren's expected sales receipt of $32,000$ per car?

c$.$ If MacLoren Automotive ships the same $10$ cars to New Zealand at a time when the spot exchange rate is NZ$$1\mathrm{.}6500/,$ how many New Zealand dollars will the distributor pay? How many pounds will MacLoren Automotive receive?

d$.$ Does a risk$-$sharing agreement such as this one shift the currency exposure from one party of the transaction to the other?

e$.$ Why is such a risk$-$sharing agreement of benefit to MacLoren? Why is it of benefit to the New Zealand distributor?

$(8$points$)$

Hurte$-$Paroxysm Products, Inc. $($HP$)$ of the United States exports computer printers to Brazil, whose currency, the reais $($symbol R$$)$ has been trading at R$$3\mathrm{.}40/$US$$.$ Exports to Brazil are currently $50,000$ printers per year at the reais equivalent of $$200$ each. A strong rumor exists that the reais will be devalued to R$$4\mathrm{.}00/$$ within two weeks by the Brazilian government. Should the devaluation take place, the reais is expected to remain unchanged for another decade. Accepting this forecast as given, HP Products faces a pricing decision which must be made before any actual devaluation: HP Products may either $(1)$ maintain the same reais price and in effect sell for fewer dollars, in which case Brazilian volume will not change, or $(2)$ maintain the same dollar price, raise the reais price in Brazil to compensate for the devaluation, and experience a $20\%$ drop in volume. Direct costs in the U$.$S$.$ are $60\%$ of the U$.$S$.$ sales price.

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a$.$ What would be the short$-$run $($one$-$year$)$ implication of each pricing strategy?

b$.$ Which do you recommend?