Question

DeMagistris Fashion Company 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/$ by October 2002. The outlook was tor a further decline in the peso's 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/s and Ps4 5/S. 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 lost for six months, at which time the exchange rate limits will be reevaluated. DeMagistris contracts to import leather coats from Acuna for Ps8,500,000 or $2,125,000 at the current spot rate of Ps4. 0/S during the next six months

a. If the exchange rate changes immediately to Ps6.0/S, what will be the dollar cost of six months of imports to DeMagistris?
b. At Ps6,0/$, what will be the peso export sales of Acuna Leather Goods to DeMagistris Fashion Company?
a. If the exchange rate changes immediately to Ps6 0/S, what will be the dollar cost of six months of imports to DeMagistris? $ (Round to the nearest dollar)
b. At Ps6 0/$ what will be the peso export sales of Acuna Leather Goods to DeMagistris Fashion Company? Ps (Round to the nearest Argentine peso.)

Answer 1

If the exchange rate changes to Ps6.0/$, DeMagistris's dollar cost for imports over six months would be $2,951,389, and Acuna Leather Goods' peso export sales would remain at Ps8,500,000.

Step-by-step explanation:

The student's question relates to how a change in the exchange rate affects the cost of imports and export sales between DeMagistris Fashion Company and Acuna Leather Goods. Exchange rates play a crucial role in international trade, influencing the incentives to export and import, and thus affecting aggregate demand and supply in the economy.

a. If the exchange rate changes to Ps6.0/$, Magistris would now have to calculate their cost based on the terms of the risk-sharing arrangement. Since the exchange rate falls outside of the agreed range (Ps3.5/$ to Ps4.5/$), they will share the risk. The calculation will be as follows:

DeMagistris cost for buying at Ps4.5/$: 8,500,000 Ps / 4.5 Ps/$ = $1,888,889
Shared risk amount: (6.0 Ps/$ - 4.5 Ps/$) / 2 * 8,500,000 Ps = 6,375,000 Ps
Dollar equivalent of shared risk: 6,375,000 Ps / 6 Ps/$ = $1,062,500
Total dollar cost: $1,888,889 + $1,062,500 = $2,951,389 (rounded to the nearest dollar)

b. At an exchange rate of Ps6.0/$, the peso export sales for Acuna Leather Goods would be the total invoice amount in pesos, which remains at Ps8,500,000, since the risk-sharing arrangement pertains to the dollar cost and not to the total invoice amount in pesos.