CHAPTER 20
EAST COAST YACHTS GOES
INTERNATIONAL
1. The biggest advantage is the increased sales, while the biggest risk is exchange rate risk. There is also
2. If the dollar strengthens, the profit will decline. Conversely, if the dollar weakens, the profit will
increase.
3. The company will pay the sales commission out of net sales, so the after-commission value of sales in
euros is:
After-commission revenue = €5,000,000(1 – .05)
After–commission revenue = €4,750,000
At the current exchange rate of $.78/€, the pre–commission sales in euros will be converted to dollars
in the amount of:
East Coast Yachts has production costs equal to 70 percent of dollar sales at this exchange rate, so the
production costs are:
So, the profit at the current exchange rate is:
If the exchange rate changes to $.82/€, the euros will convert to:
Since the production costs are fixed in dollars, the profit at this exchange rate will be:
The breakeven exchange rate is the exchange rate that will allow the after-commission costs in euros
to convert to a dollar amount that covers the production costs, so:
4. The company could use options, futures, or forwards. The downside to all three hedging vehicles is
the cost. Over time, the company will gain on some contracts and lose on others.
5. At the current exchange rate, the company will make a profit unless the exchange rate moves