Exam 9: Foreign Currency Transactions and Hedging Foreign Exchange Risk

REFERENCE: Ref.09_03 Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied: SHAPE \* MERGEFORMAT -The forward rate may be defined as

REFERENCE: Ref.09_04 On December 1,2007,Keenan Company,a U.S.firm,sold merchandise to Velez Company of Spain for 150,000 euro.Payment is due on February 1,2008.Keenan entered into a forward exchange contract on December 1,2007,to deliver 150,000 euro on February 1,2008 for $.97.Keenan chose to use a foreign currency option to hedge this foreign currency asset designated as a cash flow hedge.Relevant exchange rates follow: -When a U.S.company purchases parts from a foreign company,which of the following will result in no foreign exchange gain or loss?

REFERENCE: Ref.09_04 On December 1,2007,Keenan Company,a U.S.firm,sold merchandise to Velez Company of Spain for 150,000 euro.Payment is due on February 1,2008.Keenan entered into a forward exchange contract on December 1,2007,to deliver 150,000 euro on February 1,2008 for $.97.Keenan chose to use a foreign currency option to hedge this foreign currency asset designated as a cash flow hedge.Relevant exchange rates follow: -Compute the value of the foreign currency option at February 1,2008.

REFERENCE: Ref.09_01 Norton Co. ,a U.S.corporation,sold inventory on December 1,2008,with payment of 10,000 British pounds to be received in sixty days.The pertinent exchange rates were as follows: -What amount of foreign exchange gain or loss should be recorded on December 31?

REFERENCE: Ref.09_10 On October 1,2007,Eagle Company forecasts the purchase of inventory from a British supplier on February 1,2008,at a price of 100,000 British pounds.On October 1,2007,Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound.The option is considered to be a cash flow hedge of a forecasted foreign currency transaction.On December 31,2007,the option has a fair value of $1,600.The following spot exchange rates apply: -What journal entry should Eagle prepare on October 1,2007?

REFERENCE: Ref.09_10 On October 1,2007,Eagle Company forecasts the purchase of inventory from a British supplier on February 1,2008,at a price of 100,000 British pounds.On October 1,2007,Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound.The option is considered to be a cash flow hedge of a forecasted foreign currency transaction.On December 31,2007,the option has a fair value of $1,600.The following spot exchange rates apply: -What is the 2008 effect on net income as a result of these transactions?

REFERENCE: Ref.09_08 On May 1,2007,Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos.The machine was shipped and payment was received on March 1,2008.On May 1,2007,Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1,2008 at a price of $190,000.Mosby properly designates the option as a fair value hedge of the peso firm commitment.The option cost $3,000 and had a fair value of $3,200 on December 31,2007.The following spot exchange rates apply: Mosby's incremental borrowing rate is 12 percent,and the present value factor for two months at a 12 percent annual rate is .9803. -What was the net impact on Mosby's 2007 income as a result of this fair value hedge of a firm commitment?

REFERENCE: Ref.09_03 Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied: SHAPE \* MERGEFORMAT -A U.S.company buys merchandise from a foreign company denominated in U.S.dollars.Which of the following statements is true?

REFERENCE: Ref.09_03 Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied: SHAPE \* MERGEFORMAT -All of the following data may be needed to determine the fair value of a forward contract at any point in time except

REFERENCE: Ref.09_03 Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied: SHAPE \* MERGEFORMAT -All of the following hedges are used for future purchase/sale transactions except