Dell is selling 30,000 units in Europe at an average price of €1,500 per unit. Both the spot and forward exchange rates are $1.20/€. The cost of each unit in dollars is $1,300 per unit. The elasticity of demand for Dell computers in Europe is ε = 1.5.
Now consider a depreciation of Euro (relative to US dollar) from $1.20/€ to $1.08/€ and assume zero passthrough. What is Dell’s dollar profit exposure?
$45 million
€45 million
$20 million
€20 million