Chapter 19, Problem 18SP

a)

Summary Introduction

To determine: The cost incurred by Company Y to produce the SY-20 in dollars.

Introduction:

Exchange rate is the rate, which indicates the conversion rate for currency of a country which can be getting in exchange of currency of another country.

Explanation of Solution

Given information:

Exchange rates of given currencies in term of the Country U dollars are as follows:

Product cost:

Hence, the cost is $331.59.

Summary Introduction

To determine: The sale price in dollar.

Introduction:

Exchange rate is the rate, which indicates the conversion rate for currency of a country which can be getting in exchange of currency of another country.

Explanation of Solution

Given information:

Exchange rates of given currencies in term of the Country U dollars are as follows:

The sale price in yen is 50,000 by Country J.

The formula to calculate sale price in dollars:

$\text{Sale price}\left(\$\right)=\text{Sale price}\left(\text{yen}\right)\times \text{Exchange rate}$

Compute the sale price:

$\begin{array}{c}\text{Sale price}\left(\$\right)=\text{Sale price}\left(\text{yen}\right)\times \text{Exchange rate}\\ =50,000\text{ yen}\times 0.00914\\ =\$457\end{array}$

Hence, the sale price in dollar is $457.

b)

Summary Introduction

To determine: The profit earned by sale of SY-20 in dollar.

Explanation of Solution

Given information:

Refer part a)

The product cost is $331.59.

The sale price of product is $457.

The formula to calculate profit:

$\text{Profit}=\text{Sale price}-\text{Product cost}$

Compute the profit:

$\begin{array}{c}\text{Profit}=\text{Sale price}-\text{Product cost}\\ =\$457-\$331.59\\ =\$125.41\end{array}$

Hence, the amount of profit earned is $125.41.

Summary Introduction

To determine: The percentage of profit.

Explanation of Solution

Given information:

Refer above parts for profit and cost.

The formula to calculate profit percentage:

$\text{Profit}\left(\%\right)=\frac{\text{Profit}}{\text{Product cost}}\times 100$

Compute the profit percentage:

$\begin{array}{c}\text{Profit}\left(\%\right)=\frac{\text{Profit}}{\text{Product cost}}\times 100\\ =\frac{\$125.41}{\$331.59}\times 100\\ =37.82\%\end{array}$

Hence, the profit percentage is 37.82%.

c)

Summary Introduction

To determine: The amount of profit after dollar depreciates by 10%.

Introduction:

Currency depreciation indicates the negative (decrease) change in the currency’s value in reference of any other currency due to some factors such as change in government policies, and fluctuation in interest rates.

Explanation of Solution

Given information:

Exchange rates of given currencies in term of the Country U dollars are as follows:

Excel spread sheet:

Excel workings:

Product cost:

Hence, the cost is $364.74.

The formula to calculate sale price in dollars:

$\text{Sale price}\left(\$\right)=\text{Sale price}\left(\text{yen}\right)\times \text{Exchange rate}$

Compute the sale price:

$\begin{array}{c}\text{Sale price}\left(\$\right)=\text{Sale price}\left(\text{yen}\right)\times \left(\text{Exchange rate}\times \text{Depreciated value}\right)\\ =50,000\text{ yen}\times \left(0.00914\times 1.10\right)\\ =\$502.70\end{array}$

Hence, the sale price in dollar is $502.70.

Compute the profit:

$\begin{array}{c}\text{Profit}=\text{Sale price}-\text{Product cost}\\ =\$502.70-\$364.74\\ =\$137.95\end{array}$

Hence, the amount of profit earned is $137.95.

d)

Summary Introduction

To determine: The amount of profit earned in terms of dollars and its percentage (when dollar weaken by 10% for yen only).

Explanation of Solution

Given information:

Exchange rates of given currencies in term of the Country U dollars are as follows:

The formula to calculate sale price in dollars:

$\text{Sale price}\left(\$\right)=\text{Sale price}\left(\text{yen}\right)\times \text{Exchange rate}$

The formula to calculate profit percentage:

$\text{Profit}\left(\%\right)=\frac{\text{Profit}}{\text{Product cost}}\times 100$

Product cost:

Hence, the cost is $331.59.

Compute the sale price:

$\begin{array}{c}\text{Sale price}\left(\$\right)=\text{Sale price}\left(\text{yen}\right)\times \text{Exchange rate}\\ =50,000\text{ yen}\times 0.00914\\ =\$457\end{array}$

Hence, the sale price in dollar is $457.

Compute the sale price:

$\begin{array}{c}\text{Sale price}\left(\$\right)=\text{Sale price}\left(\text{yen}\right)\times \left(\text{Exchange rate}\times \text{Depreciated value}\right)\\ =50,000\text{ yen}\times \left(0.00914\times 1.10\right)\\ =\$502.70\end{array}$

Hence, the sale price in dollar is $502.70.

Compute the profit:

$\begin{array}{c}\text{Profit}=\text{Sale price}-\text{Product cost}\\ =\$502.70-\$331.59\\ =\$171.11\end{array}$

Hence, the amount of profit earned is $171.11.

Compute the profit percentage:

$\begin{array}{c}\text{Profit}\left(\%\right)=\frac{\text{Profit}}{\text{Product cost}}\times 100\\ =\frac{\$171.11}{\$331.59}\times 100\\ =51.60\%\end{array}$

Hence, the profit percentage is 51.60%.

e)

Summary Introduction

To determine: The rate of return of securities in S country.

Explanation of Solution

Given information:

The interest rate of securities in U is 4.9% or 0.049.

The spot exchange rate is 0.9566.

The 180-forward exchange rate is 0.9449.

Note: The Country U nominal rate is on an annual basis. So the calculation is based on 180 days

Equation of interest rate parity:

$\frac{\text{Forwad exchange rate}}{\text{Spot exchange rate}}=\frac{\left(1+{\text{r}}_{\text{h}}\right)}{\left(1+{\text{r}}_{\text{f}}\right)}$

Where,

• ${\text{r}}_{\text{h}}$ is interest rate of securities in U.
• ${\text{r}}_{\text{f}}$ is interest rate of securities in S.

$\begin{array}{c}\frac{\text{Forwad exchange rate}}{\text{Spot exchange rate}}=\frac{\left(1+{\text{r}}_{\text{h}}\right)}{\left(1+{\text{r}}_{\text{f}}\right)}\\ \frac{0.9449}{0.9566}=\frac{\left(1+\frac{0.049}{2}\right)}{\left(1+\frac{{\text{r}}_{\text{f}}}{2}\right)}\\ 0.98777=\frac{\left(1.0245\right)}{\left(1+\frac{{\text{r}}_{\text{f}}}{2}\right)}\\ \frac{{\text{r}}_{\text{f}}}{2}=1-\frac{1.0245}{0.98777}\end{array}$

$\begin{array}{c}\frac{{\text{r}}_{\text{f}}}{2}=1-1.037185\\ \frac{{\text{r}}_{\text{f}}}{2}=0.037185\\ {\text{r}}_{\text{f}}=7.437\%\end{array}$

Hence, the rate of return is 7.437%.

f)

Summary Introduction

To determine: The price of product in UK country (pounds) instead of Country J.

Introduction:

Purchasing Power Parity (PPP) refers to that relationship which indicates the same cost of s same kinds of products in the market of various countries after adjustment of exchange rates of currencies. This relationship of common price can be termed as the law of one price.

Explanation of Solution

Given information:

The cost of product in the J country is 50,000 yen.

The spot exchange rate of the one pound in yen is 140.8602.

Equation for purchasing power parity:

$\left({\text{P}}_{\text{h}}\right)=\left({\text{P}}_{\text{f}}\right)\times \text{Spot rate}$

Where,

• ${\text{P}}_{\text{h}}$ is price of product in home country.
• ${\text{P}}_{\text{f}}$ is price of product in foreign country.

Assume the home country in the given situation is the U Country.

Compute the price:

$\begin{array}{c}50,000\text{ yen}=\left({\text{P}}_{\text{f}}\right)\times 140.8602\\ {\text{P}}_{\text{f}}=\frac{50,000\text{ yen}}{140.8602}\\ =354.96\text{ pounds }\end{array}$

Hence, the price of product in the U country is 354.96 pounds.