LO 19.8 FX exposure (quantity risk)


Baseline Assumptions (before currency move)

German auto maker needs per car (to profit):			Euro 30,000

Today's exchange rate:		(Euro/$)	0.75 Euro
		($/Euro)	$1.3333

Price of car in dollars:			$40,000.00
Coverted into Euros			Euro 30,000

	Two Scenarios:
	Dollar		Dollar
	Appreciates		Depreciates
Euro per 1 US$	Euro 1.00		Euro 0.50
US$ per 1 Euro	$1.0000		$2.0000

Negative P/Q Relationship ("can raises prices")
Converted to US$	$30,000.00		$60,000.00
Price in Euro	Euro 30,000		Euro 30,000


Positive P/Q Relationship ("cannot raise prices")
Converted to US$	$40,000.00		$40,000.00
Price in Euro	Euro 40,000		Euro 20,000


					$120

Assume:	For U.S. Company, cost to make widget is $100
	U.S. company want to receive $120 per widget (i.e., $20 profit)

Baseline, "Before" the Currency Move
Pegged exchange rate:		Euro 8.28	Yuan/$
		$0.1208	$/Yuan

Price of a Widget (Y)		993.60 Y
Converted ($)		$120.00

			Two Scenarios:
			Dollar	Dollar
			Appreciates	Depreciates
Yuan per 1 US$			8.00 Y	9.00 Y
US$ per 1 Yuan			$0.1250	$0.1111

"Negative" Relationship
Price in Yuan			960.00 Y	1,080.00 Y
Converted to US$:			$120.00	$120.00

"Positive" Relationship
Price in Yuan			1,000.00 Y	1,000.00 Y
Converted to US$:			$125.00	$111.11

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