Reference no: EM131677106

Question: MacLoren Automotive. MacLoren Automotive manufactures British sports cars, a number of which are exported to New Zealand for payment in pounds sterling. The distributor sells the sports cars in New Zealand for New Zealand dollars. The New Zealand distributor is unable to carry all of the foreign exchange risk, and would not sell MacLoren models unless MacLoren could share some of the foreign exchange risk. MacLoren has agreed that sales for a given model year will initially be priced at a "base" spot rate between the New Zealand dollar and pound sterling set to be the spot mid-rate at the beginning of that model year. As long as the actual exchange rate is within {5% of that base rate, payment will be made in pounds sterling. That is, the New Zealand distributor assumes all foreign exchange risk. However, if the spot rate at time of shipment falls outside of this {5% range, MacLoren will share equally (i.e., 50/50) the difference between the actual spot rate and the base rate. For the current model year the base rate is NZ$1.6400/£.

a. What are the outside ranges within which the New Zealand importer must pay at the then current spot rate?

b. If MacLoren ships 10 sports cars to the New Zealand distributor at a time when the spot exchange rate is NZ$1.7000/£, and each car has an invoice cost £32,000, what will be the cost to the distributor in New Zealand dollars? How many pounds will MacLoren receive, and how does this compare with McLoren's expected sales receipt of £32,000 per car?

c. If MacLoren Automotive ships the same 10 cars to New Zealand at a time when the spot exchange rate is NZ$1.6500/£, how many New Zealand dollars will the distributor pay? How many pounds will MacLoren Automotive receive?

d. Does a risk-sharing agreement such as this one shift the currency exposure from one party of the transaction to the other?

e. Why is such a risk-sharing agreement of benefit to MacLoren? Why is it of benefit to the New Zealand distributor?