Question

NorthRim Inc. (NRI), imports extreme condition outdoor wear and equipment from the Allofit Territories Company (ATC) located in Canada. With the steady decline of the U.S dollar against the Canadian dollar NRI is finding a continued relationship with ATC to be an increasingly difficult proposition. In response to NRI's request, ATC has proposed the following risk-sharing arrangement. First, set the current spot rate as the base rate. As long as spot rates stay within 5% (up or down) NRI will pay at the base rate. Any rate outside of the 5% range, ATC will share equally with NRI the difference between the spot rate and the base rate. If the current spot rate is C$1.20/$, what are the upper and lower limits for trading to take place at C$1.20?

a. C$1.205/$ - C$1.195/$
b. C$1.15/$ - C$1.25/$
c. C$1.14/$ - C$1.26/$
d. none of the above

Answer 1

The answer is "Option C".

Step-by-step explanation:

Let

Spot rate = Base rate= 1.20

Within the
`5\%` range, the trade will taking the place at the base rate that is
`=1.20`

Calculating the lower limit:

`\to 1.20 - (5\% * 1.20) =1.20 - (0.06)= 1.20 - 0.006 = 1.14\\\\\to 1.20 + (5\% * 1.20)=1.20 + (0.06) = 1.20 + 0.006 = 1.26`