Exam 12: Derivatives and Foreign Currency: Concepts and Common Transactions

Forward contracts are negotiated contracts between three or more parties for the delivery or purchase of a commodity or foreign currency at a preagreed delivery date.

Crabby Industries,a U.S.corporation,purchased inventory from a company in Sweden on November 18,2014 when the Swedish krona was trading at 1 krona = $0.161.The transaction was for 600,000 krona,and was to be paid in krona in 90 days.Crabby closed their books at December 31 for financial reporting purposes when the krona was trading at $0.167.On February 16,2015,Crabby paid the invoice when the krona was trading at $0.156. Required: Show the journal entries recorded by Crabby on November 18,2014,December 31,2014,and February 16,2015.

A put option requires the seller to buy an asset at market price and the buyer of the put option has the option to sell the asset at market.

When the billing for a U.S.company's sale to a company in a foreign country is denominated in U.S.dollars,________ is required when preparing journal entries for the sale.

Behd Company,a U.S.firm,sold some of its inventory to Edinburgo Company,a company based in Scotland,on November 27,2014,when the local currency unit (the pound Sterling,"GBP")was trading at $1.64 : 1 GBP.The sales agreement called for Edinburgo to pay 140,000 GBP on January 26,2015.Additional exchange rates are shown below: Required: Show all related journal entries for Behd Company.

In September of 2014,Gunny Corporation anticipates that the price of heating oil will increase soon,and wishes to lock in a firm price for the winter months.They enter into a forward contract with Selton Industries to buy 100,000 barrels of oil at $160 per barrel in December 2014.Selton's cost of production of the heating oil is $120 per barrel. Required: Determine the economic impact of the transaction to Selton (the seller of the heating oil)at the market price levels indicated in the table below,with and without the hedge. Market Price per Barrel Forward Price per Bushel Unhedged Market Gain/ (Loss) Economic Gain / (Loss)on Forward Economic Income with Hedge \ 180 170 160 150 140

The common characteristic of derivatives is the contract's value to the investor has a direct relationship to fluctuations in price,rate and other variables.

Floating exchange rates reflect fluctuating market prices for a currency based on supply and demand in the world currency markets.

Ulysses Company purchases goods from China amounting to 372,372 Yuan (the transaction is denominated in the Chinese Yuan).Assume the Yuan is trading at $0.154 at the date the goods are ordered,and the Yuan is trading at $0.155 at the date the goods are received.When the invoice is paid a month later,the Yuan is trading at $.156.Assume all three dates are in the same fiscal year.Which of the following is true?

Meric Corporation (a U.S.company)began operations on January 1,2014,when the owner borrowed $150,000 to start the company.In the first month of operations,Meric had the following transactions: $\text { January } 10,2014\quad \text { Paid } \$ 3,000 \text { in other operating expenses }$ $\text { Janury 23,2014 \quad Acquired and paid half of the Brazlian real owed to the Brazilian supplier }$ January 28,2014 $\quad$ Collected half of the 32,000 pounds from the customer in Great Britain and immediately converted them into U.S, dollars The following exchange rates apply: January 3 \ .6260=1 real \ 1.5950=1 pound January 8 \ .6230=1 real \ 1.5760=1 pound January 10 \ .6210=1 real \ 1.5880=1 pound January 23 \ .6250=1 \ 1.5610=1 pound January 28 \ .6330=1 \ 1.5570=1 pound January 31 \ .6180=1 \ 1.5720=1 pound Required: Complete the summary income statement and balance sheet for the month ended January 31,2014 assuming there were no other transactions.