50.1K

Verified Solution

Link Copied!

Sometimes in November Year 1 (Y1), Alexander Inc., a US based importer of olive oil placed an order for 500 cases of olive oil at a price of 100 Euros per case. The pertinent exchange rates are given below.

DATE SPOT FORWAR RATE CALL OPTION PREMIUM FOR

RATE (to January 31, Y2) 1/31/Y2 (Strike price of $1)

12/1/Y1 $1.00 $1.08 $0.04

12/31/Y1 $1.12 $1.20 $0.12

1/31/Y2 $1.15 $1.15 $0.15

Alexander Inc. has effective borrowing rate of 12% (1% per month). The companys fiscal year ends on December 31. Present value factor at 1% per month is 0.9901.

1. Assume that the olive oil was received on December 1, Y1 and payment was made on January 31, Y2. There was no attempt to hedge the exposure to foreign exchange risk. Prepare journal entries to account for this import purchase.

2. Assume the olive oil was received on December 1, Y1 and payment was made on January 31, Y2. On December 1, Y1, Alexander Inc. entered into a two-month forward contract to purchase 50,000 Euros. The forward contract is properly designated as a fair value hedge of a foreign currency payable. Prepare journal entries to account for the import purchase and foreign currency forward contract.

3. The olive oil was ordered on December 1, Y1. It was received and paid for on January 31, Y2. On December 1, Y1, Alexander Inc. entered into a two-month forward contract to purchase 50,000 Euros. The forward contract is properly designated as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured through reference to changes in the forward rate. Prepare journal entries to account for the foreign currency forward contract, firm commitment, and import purchase.

4. The olive oil was received on December 1, Y1 and payment was made on January 31, Y2. On December 31, Y1, Alexander Inc. purchased a two-month call option for 50,000 Euros. The option was properly designated as a cash flow hedge of a foreign currency payable. Prepare journal entries to account for the import purchase and foreign currency option.

5. The olive oil was ordered on December 1, Y1. It was received and paid for on January 31, Y2. On December 1, Y1, Alexander Inc. purchased a two-month call option for 50,000 Euros. The option was properly designated as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured through reference to change in the spot rate. Prepare journal entries to account for foreign currency option, firm commitment, and import purchase.

Answer & Explanation Solved by verified expert

See Answer