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In alternative universe, the Australian government has decided to enter into a target-zone arrangement with the United States
In alternative universe, the Australian government has decided to enter into a target-zone arrangement with the United States. Australian firm K-Roo has a USD 150,000 payable due in 180 days. Assuming the current exchange rate is AUD1.44/USD, the central rate for the USD/AUD is set at 0.5 USD per AUD, and the currencies are allowed to fluctuate with a 10% band on either side, what is the maximum possible amount (in terms of AUD) that K-Roo could lose due to changes in the future exchange rate?
Select one: a. 114000.00 b. 101416.67 c. 133500.00 d. 21600.00 e. -54000.00
Expert Solution
Spot Rate = AUD1.44/USD
Future Rate = 0.5 USD/AUD = 2 AUD/USD
This Future Rate can fluctuate 10% either side (10%of 2). Thus Future Rate can lie between 1.8 AUD/USD to 2.2 AUD/USD.
Loss will be maximum if AUD depreciates . Therefore Expected Future rate will be 2.2 AUD/USD.
Entire Loss for Transaction = ( 2.2 - 1.44 )* 150,000 = AUD 114,000.00
CORRECT OPTION a AUD 114,000.00
ALL other options are numerically Incorrect.
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