Du Pont has entered into a currency risk sharing arrangement with British Gas.Under the contract,Du Pont agrees to pay British Gas a base price of $10 million for gas purchases,but the parties would share the currency risk equally beyond a neutral zone,specified as a band of exchange rates: $1.67?1.73:£1.Within the neutral zone,Du Pont must pay BG the pound equivalent of $10 million at the base rate of $1.70.Suppose the spot rate at the time of payment is £1 = $1.63.How much will Du Pont owe British Gas?
A)$10 million
B)$9,702,381
C)$9,588,235
D)$9,819,277

Question

Quizplus · Accepted Answer

Since the spot rate at the time of payment is £1 = $1.63, it is below the neutral zone range of $1.67-$1.73. Therefore, Du Pont must pay the pound equivalent of $10 million at the base rate of $1.70. 
$10 million / $1.70 = £5,882,353. 
However, because the pound has depreciated against the dollar, Du Pont will owe British Gas more in dollars than they would have if the exchange rate had been within the neutral zone. 
£5,882,353 x $1.63/£1 = $9,702,381.
Therefore, the correct answer is B.

Du Pont Has Entered into a Currency Risk Sharing Arrangement