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Business valuations and market efficiency

Chapter 13

Question 1

Transaction risk

On 1 Sep a US company enters into a contract with a customer for which
€100,000 is due to be received in 6 months. The exchange rate on the date the
contract is entered into is €0.93 = $1.

Calculate the change in $ received compared to 1 Sep if the exchange rate
moves to:

(1) €0.97 = $1

(2) €0.89 = $1

$ received at rate on 1 Sep = €100,000/0.93 = $107,527

(1) If rate moves to €0.97 = $1, $ received = €100,000/0.97 = $103,093, a
loss of $4,434 compared to 1 Sep.

(2) If rate moves to €0.89 = $1, $ received = €100,000/0.89 = $112,360, a
gain of $4,833 compared to 1 Sep.

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