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Boisjoly Watch Imports has agreed to purchase 15,000 Swiss watches for 1 million francs at today's spot rate
Boisjoly Watch Imports has agreed to purchase 15,000 Swiss watches for 1 million francs at today's spot rate. The firm's financial manager, James Destreumaux, has noted the following current spot and forward rates:
U.S. Dollar/Franc Franc/U.S. Dollar
Spot 1.6590 0.6028
30-day forward 1.6540 0.6046
90-day forward 1.6460 0.6075
180-day forward 1.6400 0.6098
On the same day, Desreumaux agrees to purchase 15,000 more watches in 3 months at the same price of 1 million francs.
What is the price of the watches, in U.S. dollars, if purchased at today's spot rate?
What is the cost, in dollars, of the second 15,000 batch if payment is made in 90 days ant the spot rate at that time equals today's 90-day forward rate?
If the exchange rate for the Swiss franc is 0.50 to $1 in 90 days, how much will he have to pay for the watches (in dollars)?
Expert Solution
1. At today's spot rate, 1 million francs is equal to:
1M*0.6028=602,800 ($US)
So the price of the watches at today's spot rate is US$ 602,800.
2. At the time of 90 days later, the rate then would be 0.6075 (Franc/US)
Thus the price of the second batch = 1M*0.6075 = 607,500 ($US)
3. If the exchange rate is 0.5 to $1 in 90 days, the person has to pay:
1M*0.5 = 500,000 ($US).
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