What are the potential risks faced by an Audi distributor in Bloomington dealing with international transactions?

What is the order placed by the Audi distributor in Bloomington and what are the terms of the deal?

The Audi distributor in Bloomington has placed an order for 100 Audi A4s to be delivered on May 1. The payment of €5,500,000 for the 100 cars will be made on delivery. The spot exchange rate on Feb 1 is 1.07 $/€.

Understanding the Risks in International Transactions

When conducting international transactions, especially dealing with Euros and Dollars, the Audi distributor in Bloomington faces a potential risk known as exchange rate risk. This risk arises from the fluctuating exchange rates between currencies, which can impact the profitability of the transactions.

Exchange Rate Risk: The distributor is exposed to exchange rate risk due to the difference in currencies used for purchasing the cars (Euros) and selling them (Dollars). The initial exchange rate provides a margin of $1,150 per car, but this margin could be eroded by foreign exchange fluctuations.

Calculating the Price in Dollars

Given the spot exchange rate on Feb 1 of 1.07 $/€, the purchase price of €55,000 per car translates to $58,850 per car. While the market price of an Audi A4 in the US is $60,000, leaving a margin of $1,150 per car.

Impact of Exchange Rate Fluctuations: Foreign exchange fluctuations could potentially reduce or erase the margin of $1,150 per car. It's crucial to note that the distributor cannot adjust the price of the cars to mitigate exchange rate losses, as the market sets the price.

Therefore, it's essential for the Audi distributor to manage exchange rate risk effectively to protect their profitability and navigate the uncertainties in international business transactions.