Reference no: EM131677100

Question: Risk-Sharing at Harley Davidson. Harley-Davidson (U.S.) reportedly uses risk-sharing agreements with its foreign subsidiaries and with independent foreign distributors. Because these foreign units typically sell to their local markets and earn local currency, Harley would like to ease their individual currency exposure problems by allowing them to pay for merchandise from Harley (U.S.) in their local functional currency. The spot rate between the U.S. dollar and the Australian dollar on January 1 is A$1.3052/US$. Assume that Harley uses this rate as the basis for setting its central rate or base exchange rate for the year at A$1.3000/US$. Harley agrees to price all contracts to Australian distributors at this exact exchange rate as long as the current spot rate on the order date is within {2.5% of this rate. If the spot rate falls outside of this range, but is still within {5.0% of the central rate, Harley will "share" equally (i.e., "50/50") the difference between the new spot rate and the neutral boundary with the distributor.

a. Diagram and detail the exact exchange rates in effect for both the upper and lower boundaries of the fixed rate and sharing zones used by Harley.

b. If Harley ships a hog (the nickname of the HarleyDavidson motorcycle) costing US$8,500, and the spot exchange rate on the order date is A$1.3442/ US$, what is the price to the Australian dealership?

c. If Harley ships a hog costing US$8,500, and the spot exchange rate on the order date is A$1.2940/US$, what is the price to the Australian dealership?