FIN 301: HW 6

The selling price of imported olive oil is $20 per case. Your cost is 15 Euros per case, and the exchange rate is currently 1.25, so it takes 1.25 Euros to buy $1. Your largest customer has ordered 15,000 cases of olive oil. How much is the pretax profit for this transaction?

$120,000 Cost of Filling the Order = 15/1.25 = $12.00 per case Pretax Profit = 15,000 × ($20 − 12) = $120,000

The Simpson Corporation is calculating their adjusted balance sheet into U.S. Dollars. The exchange rate at the beginning of the year was $1 Euro = $1 U.S. dollar. The current exchange rate is .80 Euros to $1.00. Net Income for the year was zero. How much is the accounting gain/loss due to the exchange rate change? Beginning Balance Sheet: Assets = 3,000 Euros Equity = 1,500 Euros Liabilities = 1,500 Euros

$375, gain Beginning Balance Sheet: Assets = 3,000 Euros Equity = 1,500 Euros Liabilities = 1,500 Euros Adjusted Balance Sheet: (Euros 1 = $1) Assets = 3,000 USD Equity = 1,500 USD Liabilities = 1,500 USD Adjusted Balance Sheet: (Euros .8 = $1) Assets = 3,750 USD Equity = 1,875 USD Liabilities = 1,875 USD Equity increased from $1,500 to $1,875; a gain of $375.

Types of exchange rate risk include all of the following, except:

Interest rate exposure