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The Vaderson Forecasting Associates sells a broad range of economic forecasting services to businesses and government agencies. One of its primary products is the Vaderson Exchange Rate Seer, a model that forecasts future spot exchange rates.
Finley, Incorporated, a maker and exporter of Fightin Blue Hen paraphernalia, has just received a large order from Kruse, AG, a large Swiss retailing chain. Delivery of the merchandise would occur in two years, and Finley wishes to determine the price in Swiss francs (CHF) to charge for the order. If the items were being sold for delivery today, Finley would want to receive $1.4 million, an amount that would recover all variable costs and make an acceptable contribution to overhead and profit. The current exchange rate between the $ and the CHF is $0.66/CHF.
Finley expects that its (dollar) costs will rise at about 3 percent per year over the coming two years and would like to recover these cost increases in proportional increases in the contract price. The annual yield on 2-year Treasury bonds is 5.5 percent in the United States. Similar risk bonds sell to yield 4.5 percent annually in Switzerland. Vaderson forecasts that the spot rate of exchange between the $ and the CHF will be $0.64/CHF. If you had to make a recommendation regarding the pricing of this order, what is the best estimate of the price (in CHF) you can recommend that management charge if it wants to just cover its costs and profit objectives?
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