Assignment 2: Exchange Rates You Own And Operate A Chain Of

Assignment 2 Exchange Ratesyou Own And Operate A Chain Of Electronic

Assignment 2: Exchange Rates You own and operate a chain of electronic stores in Texas and you are considering expanding your inventory to include tablet work stations for small businesses. There is only one supplier of the brand of tablets you would like to stock in your store, and that firm is located in Mexico. You have researched the current spot and forward rates between the U.S. and Mexico, as indicated in Table-1: TABLE-1 Spot Rate 30-Day Forward 90-Day Forward 180-Day Forward U.S. Dollar/Peso 1.7851 1.7052 1.8051 1.7555 Peso/U.S. Dollar ? ? ? ?

Questions: Complete the Peso/ U.S. Dollar row in Table-1 and explain your methodology. If you agree to pay 2-million pesos for 100,000 tablets at today’s spot rate, how much would you pay in U.S. dollars? If you agree to pay 2-million pesos but wait 180 days and end up paying the 180-Day forward rate, how much would you be paying for the 100,000 tablets, in U.S. Dollars?

Your competitors sell the tablet for $41.20 and you must mark your product up from cost by at least 20% to earn a minimal profit, should you buy the tablets today? Explain your answer. Should you wait to buy the tablets in 30 days at the current 30-day forward rate? Explain your answers.

Paper For Above instruction

The calculation of the Peso to U.S. Dollar exchange rate, specifically the Peso/U.S. Dollar ratio, is essential to accurately understand currency conversions and make informed purchasing decisions in international trade. In this analysis, the missing Peso/U.S. Dollar rate for Table-1 can be derived from the reciprocal of the current U.S. Dollar/Peso spot rate. Since the spot rate indicates that 1 U.S. dollar equals 1.7851 pesos, the corresponding Peso/U.S. Dollar rate can be calculated as the inverse:

Peso/U.S. Dollar = 1 / (U.S. Dollar/Peso) = 1 / 1.7851 ≈ 0.5602

This reciprocal calculation aligns with standard foreign exchange principles and provides the necessary conversion factor. Understanding this provides a comprehensive view of the currency market and aids in planning foreign purchases.

Next, considering the purchase of tablets at the current spot rate, the total cost in U.S. dollars for acquiring 2 million pesos is computed by multiplying the pesos amount by the spot rate (U.S. Dollars per Peso). Using the rate of 1.7851, the total cost in USD is:

Cost = 2,000,000 pesos / 1.7851 ≈ $1,119,936.20

This calculation demonstrates the amount payable in U.S. dollars if the purchase occurs now at the spot rate.

Similarly, if the purchase is deferred and paid at the 180-Day forward rate, which is 1.7555 U.S. Dollars per Peso, the cost in USD becomes:

Cost = 2,000,000 pesos / 1.7555 ≈ $1,139,965.74

This indicates that waiting for the 180-day forward contract would slightly increase the cost in dollars, reflecting the forward rate’s position relative to the spot rate.

Deciding whether to purchase the tablets today depends heavily on the cost and the profit margins. Given the competitors’ selling price of $41.20 per tablet, and a minimum markup of 20%, the target cost price per unit for the retailer is:

Target cost per tablet = Selling price / (1 + markup) = $41.20 / 1.20 ≈ $34.33

For 100,000 tablets, the maximum total cost acceptable to achieve at least a 20% profit margin is:

Total maximum acceptable cost = 100,000 × $34.33 ≈ $3,433,000

Compared to the cost calculated earlier for the purchase today ($1,119,936.20), the purchase price is well below this threshold, indicating the purchase is financially favorable in terms of profit margins.

However, the critical factor is whether the current cost aligns with the needs for profit and competitive pricing. Since the current calculated total cost of approximately $1,119,936.20 is substantially less than the threshold of $3,433,000, purchasing today is a financially sound decision, assuming there are no other significant costs or risks involved.

Furthermore, evaluating the opportunity to wait 30 days involves comparing the forward rate for 30 days, which is 1.7052, with the current spot rate. If the forward rate is lower than the reciprocal of the current rate, prices in dollar terms may be more favorable after 30 days. The cost in USD for 2 million pesos at the 30-day forward rate would be:

Cost = 2,000,000 / 1.7052 ≈ $1,173,068.84

This is slightly higher than the current spot purchase, suggesting that waiting 30 days would not result in a cost saving. Therefore, it is advisable to purchase today rather than wait, given the current attractive rates and profit margins.

References

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