Multinational Business Fiance

Fourteenth Edition

David K. Eiteman

Chapter 12

2. Acuna Leather Goods. DeMagistris Fashion Com- pany, based in New York City, imports leather coats

from Acuna Leather Goods, a reliable and longtime supplier, based in Buenos Aires, Argentina. Payment is in Argentine pesos. When the peso lost its parity with the U.S. dollar in January 2002, it collapsed in value to Ps4.0/$byOctober2002.Theoutlookwasforafurther decline in the pesos value. Since both DeMagistris and Acuna wanted to continue their longtime relationship, they agreed on a risk-sharing arrangement. As long as the spot rate on the date of an invoice is between Ps3.5/$ and Ps4.5/$, DeMagistris will pay based on the spot rate. If the exchange rate falls outside this range, they will share the difference equally with Acuna Leather Goods. The risk-sharing agreement will last for six months, at which time the exchange rate limits will be reevaluated. DeMagistris contracts to import leather coats from Acuna for Ps8,000,000 or $2,000,000 at the current spot rate of Ps4.0/$ during the next six months.

a. If the exchange rate changes immediately to Ps6.00/$, what will be the dollar cost of six months of imports to DeMagistris? b. At Ps6.00/$, what will be the peso export sales of Acuna Leather Goods to DeMagistris Fashion Company?