Case Study:
Chrysler Shares Its Currency Risk with Mitsubishi
In 1983, Chrysler entered into a contract with Mitsubishi Motors Corporation for V6 engines. This contract, which became the major element of Chrysler’s foreign currency exposure, stipulated that for exchange rates from ¥240 to ¥220 to the dollar, Mitsubishi would absorb the entire cost of an exchange rate change. Within the range ¥220/$ to ¥190/$, Chrysler and Mitsubishi split the cost of exchange rate shifts evenly. In the range ¥190/$ to ¥130/$, Chrysler bore 75% of the costs of exchange rate shifts; below ¥130/$, Chrysler had to absorb the entire cost. Assume that the exchange rate at the time of the contract was ¥240/$ and that the price of a V6 engine was contractually set at ¥270,000.
Q1. Show how the dollar cost to Chrysler of an engine changed over the range ¥240/$ to ¥100/$.
Q2. Show how Mitsubishi’s yen revenue per engine changed over the range ¥240/$ to ¥100/$.
Q3. Suppose at the time of a new engine shipment, the exchange rate was ¥150/$. What was the dollar cost to Chrysler per engine? What was Mitsubishi’s yen revenue per engine?
Your answer must be, typed, double-spaced, Times New Roman font (size 12), one-inch margins on all sides, APA format and also include references.