Yohe Telecommunications is a multinational corporation that produces and distributes telecommunications technology. Although its corporate headquarters are located in Maitland, Florida, Yohe usually buys its raw materials in several different foreign countries using several different foreign currencies. The matter is further complicated because Yohe often sells its products in other foreign countries. One product in particular, the SY-20 radio transmitter, draws Component X, Component Y, and Component Z (its principal components) from Switzerland, France, and England, respectively. Specifically, Component X costs 165 Swiss francs, Component Y costs 20 euros, and Component Z costs 105 British pounds. The largest market for the SY-20 is Japan, where the product sells for 38,000 Japanese yen. Naturally, Yohe is intimately concerned with economic conditions that could adversely affect dollar exchange rates. You will find Tables 17-1, 17-2, and 17-3 useful for completing this problem.
a. How much in dollars does it cost Yohe to produce the SY-20? What is the dollar sale price of the SY-20?
b. What is the dollar profit that Yohe makes on the sale of the SY-20? What is the percentage profit?
c. If the U.S. dollar was to weaken by 10% against all foreign currencies, what would be the dollar profit for the SY-20?
d. If the U.S. dollar was to weaken by 10% only against the Japanese yen and remained constant relative to all other foreign currencies, what would be the dollar and percentage profits for the SY-20?
e. Using the 180-day forward exchange information, calculate the return on 1-year securities in Switzerland assuming the rate of return on 1-year securities in the United States is 4.9%.
f. Assuming that purchasing power parity (PPP) holds, what would be the sale price of the SY-20 if it was sold in England rather than Japan?