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Foreign Exchange Market and International Monetary Exchange IssuesYou are the purchasing manager for Aurora Inc, a USA international corporation that will be adding new facilities in the USA. For this expansion you will need in addition to other materials, 10,000 running feet of knotty pine lumber next year.1. Without considering Transportation, duty, insurance and taxes assume the following cost:Cost to purchase the lumber in the USA = $20,000Cost to Purchase the lumber in Argentina = 57,000 Argentine PesosCost to purchase the lumber in Mexico = 225000 Mexico PesosFrom where will you purchase the lumber all other factors being equal?2. Now, your logistics department (a little late) informs you of the following:Transportation, insurance, duty and taxes for shipment from Argentina will add 40% to the cost of the product delivered USA plant.Transportation, insurance, duty and taxes for shipment from Mexico will add 10% to the cost of the product FOB USA Plant.From where will you now Purchase the lumber?3. Finally, a little later (which it seems is always how it happens) but better late than never, your finance department tells you to expect an inflation rate of almost 30% in Argentina next year and 5% in Mexico.Will this affect you decision, if so, how and why?Based on the information available, what assumptions would you make, what currency would you prefer and what sales terms would you recommend?There are two important considerations to be aware of in this scenario:Inflation is country Specific. This means that it affects the currency exchange of the subject country when dealing with other nation’s currencies but does not directly affect or change the currency of any another nation.The contract will be written this year for delivery and payment next year.So, based on the information that you now have:What assumptions would you make?What currency would you prefer?What sales terms would you recommend?Help notes:For best and easiest results, convert everything to US dollars first. However, this does not necessarily mean that the final contract currency should be in US dollars. The final contract currency should depend on the best possible solution for the purchasing firm (you) based on the contract written this year for delivery and payment next year assuming all issues outlined in the exercise.Currency can be converted by either method of multiplication or division using an exchange rate table .Convert the currency using table (arrange alphabetical by currency).You can check your answer by converting both ways (Multiply by one column and divide by the other). If the answer comes out exactly the same you did it right, if not just switch columns and do it again.Determine how the inflation rate might or might not affect your decision concerning contract negotiation, in particular, what currency will you want to specify in the contract.Inflation is country specific; it only affects the value of the target country when converting to other international currencies.

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