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The financial context of business II: International aspects

Question 1

Transaction risk

A UK business enters into a contract to provide goods to a foreign customer in
the United States. The contract is invoiced for the value of $600,000 at a time
when the exchange rate between US$ and UK £ is £1 = $1.50.

If the exchange rate at the time of settlement of the invoice is £1 = $1.60, how
much has the UK business gained or lost in terms of the £ received on the
transaction since the invoice date?

Original £ value at time of invoice = $600,000/1.5 = £400,000

£ value at time of invoice settlement = $600,000/1.6 = £375,000

The UK business has lost out by £25,000.

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