What is Rolls-Royce’s gain or loss, in pound terms, on its dollar transaction exposure?
Rolls-Royce, the British jet engine manufacturer, sells engines to U.S. airlines and buys parts from U.S. companies. Suppose it has accounts receivable of $1.5 billion and accounts payable of $740 million. It also has borrowed $600 million. The current spot rate is $1.5128/£.
a. What is Rolls-Royce’s dollar transaction exposure in dollar terms? In pound terms?
b. Suppose the pound appreciates to $1.7642/£. What is Rolls-Royce’s gain or loss, in pound terms, on its dollar transaction exposure?