Question: DeMagistris Fashion Company, based in New York City, imports leather coats from Acuña Leather Goods, a reliable and longtime supplier, based in Buenos Aires, Argentina. Payment is in Argentine pesos. When the peso lost its parity with the U.S. dollar in January 2002 it collapsed in value to Ps 4.0/$ by October 2002. The outlook was for a further decline in the peso's value. Since both DeMagistris and Acuña wanted to continue their longtime relationship they agreed on a risk-sharing arrangement. As long as the spot rate on the date of an invoice is between Ps3.5/$ and Ps4.5/$ DeMagistris will pay based on the spot rate. If the exchange rate falls outside this range they will share the difference equally with Acuña Leather Goods. The risk-sharing agreement will last for six months, at which time the exchange rate limits will be reevaluated. DeMagistris contracts to import leather coats from Acuña for Ps8,000,000 or $2,000,000 at the current spot rate of Ps4.0/$ during the next six months.
Assume the exchange rate is Ps6.00/$ and DeMagistras Fashion Company owes Ps8,000,000 to Acuna Leather.
a. What will be cost of the imports in dollars to DeMagistris? Show work.
b. What will be the pesos export sales price in pesos to Acuna? Show work.
c. Who was the beneficiary of this risk sharing agreement? Explain why.