Exam 9: Foreign Currency Transactions and Hedging Foreign Exchange Risk

Woolsey Corporation, a U.S. company, expects to sell goods to a British customer at a price of 250,000 pounds, with delivery and payment to be made on October 24. On July 24, Woolsey purchased a three-month put option for 250,000 British pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction expected to be completed in late October. The following exchange rates apply: Option strike price \ 2.17 Option cost \ 4,000 July 24 spot rate \ 2.17 October 24 spot rate \ 2.13 October 24 option premium \ .04 -Atherton, Inc., a U.S. company, expects to order goods from a foreign supplier at a price of 100,000 lira, with delivery and payment to be made on April 17. On January 17, Atherton purchased a three-month call option on 100,000 lira and designated this option as a cash flow hedge of a forecasted foreign currency transaction. The following exchange rates apply: Option strike price \ 4.34 Option cost \ 5,000 July 24 spot rate \ 4.34 April 17 spot rate \ 4.26 What amount will Atherton include as an option expense in net income for the period January 17 to April 17?

A forward contract may be used for which of the following? 1) A fair value hedge of an asset. 2) A cash flow hedge of an asset. 3) A fair value hedge of a liability. 4) A cash flow hedge of a liability.

Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco's fiscal year-end. The pertinent exchange rates were as follows: May 8 Spot rate: \ 1.25 May 31 Spot rate: \ 1.26 Jun. 7 Spot rate: \ 1.20 -On June 1, CamCo received a signed agreement to sell inventory for ¥500,000. The sale would take place in 90 days. CamCo immediately signed a 90-day forward contract to sell the yen as soon as they are received. The spot rate on June 1 was ¥1 =$.004167, and the 90-day forward rate was ¥1 = $.00427. At what amount would CamCo record the Forward Contract on June 1?

The forward rate may be defined as

On November 10, 2011, King Co. sold inventory to a customer in a foreign country. King agreed to accept 96,000 local currency units (LCU) in full payment for this inventory. Payment was to be made on February 1, 2012. On December 1, 2011, King entered into a forward exchange contract wherein 96,000 LCU would be delivered to a currency broker in two months. The two month forward exchange rate on that date was 1 LCU = $.30. Any contract discount or premium is amortized using the straight-line method. The spot rates and forward rates on various dates were as follows: The company's borrowing rate is 12%. The present value factor for one month is .9901. -(A) Assume this hedge is designated as a fair value hedge. Prepare the journal entries relating to the transaction and the forward contract. (B) Compute the effect on 2011 net income. (C) Compute the effect on 2012 net income.

Which statement is true regarding a foreign currency option?

Williams, Inc., a U.S. company, has a Japanese yen account receivable resulting from an export sale on March 1 to a customer in Japan. The exporter signed a forward contract on March 1 to sell yen and designated it as a cash flow hedge of a recognized receivable. The spot rate was $.0094, and the forward rate was $.0095. Which of the following did the U.S. exporter report in net income?

On October 1, 2011, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2012, at a price of 100,000 British pounds. On October 1, 2011, 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, 2011, the option has a fair value of $1,600. The following spot exchange rates apply: Date Spot Rate October 1, 2011 \ 2.00 December 31, 2011 \ 1.97 February 1,2012 \ 2.01 -What is the amount of option expense for 2012 from these transactions?

Alpha, Inc., a U.S. company, had a receivable from a customer that was denominated in Mexican pesos. On December 31, 2010, this receivable for 75,000 pesos was correctly included in Alpha's balance sheet at $8,000. The receivable was collected on March 2, 2011, when the U.S. equivalent was $6,900. How much foreign exchange gain or loss will Alpha record on the income statement for the year ended December 31, 2011?

Primo Inc., a U.S. company, ordered parts costing 100,000 rupee from a foreign supplier on July 7 when the spot rate was $.025 per rupee. A one-month forward contract was signed on that date to purchase 100,000 rupee at a rate of $.027. The forward contract is properly designated as a fair value hedge of the 100,000 rupee firm commitment. On August 7, when the parts are received, the spot rate is $.028. At what amount should the parts inventory be carried on Primo's books?

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2011: Mar. 1 Bought inventory costing 60,000 pesos on credit. May 1 Sold 60\% of the inventory for 54,000 pesos on credit. Aug. 1 Collected 48,000 pesos from customers Sept. 1 Paid 36,000 pesos to creditors The appropriate exchange rates during 2011 were as follows: Exchange Date Rate March 1, 2011 \ .20=1 peso May 1, 2011 \ .22=1 peso August 1,2011 \ .23=1 peso September 1,2011 \ .24=1 peso December 31,2011 \ .25=1 peso -Prepare all journal entries in U.S. dollars along with any December 31, 2011 adjusting entries. Coyote uses a perpetual inventory system.

On May 1, 2011, 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, 2012. On May 1, 2011, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2012 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, 2011. The following spot exchange rates apply: Date Spot Rate May 1, 2011 \ 0.095 December 31,2011 \ 0.094 March 1,2012 \ 0.089 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 overall result of having entered into this hedge of exposure to foreign exchange risk?

What is the major assumption underlying the one-transaction perspective?

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2011: Mar. 1 Bought inventory costing 60,000 pesos on credit. May 1 Sold 60\% of the inventory for 54,000 pesos on credit. Aug. 1 Collected 48,000 pesos from customers Sept. 1 Paid 36,000 pesos to creditors The appropriate exchange rates during 2011 were as follows: Exchange Date Rate March 1, 2011 \ .20=1 peso May 1, 2011 \ .22=1 peso August 1,2011 \ .23=1 peso September 1,2011 \ .24=1 peso December 31,2011 \ .25=1 peso -What amount will Coyote Corp. report in its 2011 income statement for Cost of goods sold?

U.S. GAAP provides guidance for hedges of all the following sources of foreign exchange risk except

A U.S. company buys merchandise from a foreign company denominated in U.S. dollars. Which of the following statements is true?

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2011: Mar. 1 Bought inventory costing 60,000 pesos on credit. May 1 Sold 60\% of the inventory for 54,000 pesos on credit. Aug. 1 Collected 48,000 pesos from customers Sept. 1 Paid 36,000 pesos to creditors The appropriate exchange rates during 2011 were as follows: Exchange Date Rate March 1, 2011 \ .20=1 peso May 1, 2011 \ .22=1 peso August 1,2011 \ .23=1 peso September 1,2011 \ .24=1 peso December 31,2011 \ .25=1 peso -What amount will Coyote Corp. report in its 2011 income statement for Sales?

Winston Corp., a U.S. company, had the following foreign currency transactions during 2011: (1.) Purchased merchandise from a foreign supplier on July 16, 2011 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2011 at the U.S. dollar equivalent of $54,000. (2.) On October 15, 2011 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2011. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2011, and $299,000 on October 15, 2012. -What amount should be included as a foreign exchange gain or loss from the two transactions for 2012?

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2011: Mar. 1 Bought inventory costing 60,000 pesos on credit. May 1 Sold 60\% of the inventory for 54,000 pesos on credit. Aug. 1 Collected 48,000 pesos from customers Sept. 1 Paid 36,000 pesos to creditors The appropriate exchange rates during 2011 were as follows: Exchange Date Rate March 1, 2011 \ .20=1 peso May 1, 2011 \ .22=1 peso August 1,2011 \ .23=1 peso September 1,2011 \ .24=1 peso December 31,2011 \ .25=1 peso -What amount will Coyote Corp. report in its 2011 balance sheet for Accounts receivable?

Where can you find exchange rates between the U.S. dollar and most foreign currencies?