A US Company Acquired a Subsidiary in Denmark Several Years Ago

Essay

A U.S. company acquired a subsidiary in Denmark several years ago. The subsidiary's functional currency is the krone (kr). Following is financial information for the subsidiary for 2021:
$\begin{array}{lr}\text { January } 1,2021 \text { net assets } & \text { kr250,000 } \\\text { Reported net income } & 10,000 \\\text { Dividends } & 2,000\end{array}$

$\text { Exchange rates }\{\$ / \mathrm{kr}\} \text { are as follows: }$

$\begin{array}{|l|c|c|}\hline & \text { Spot Rate } & \begin{array}{c}\text { Forwa rd Rate for } \\\text { December 31,2021 Delivery }\end{array} \\\hline \text { January 1, 2021 } & \$ 0.165 & \$ 0.167 \\\hline \text { 2021 average } & 0.162 & \mathrm{~N} / \mathrm{A} \\\hline \text { Rate when dividends declared } & 0.160 & \mathrm{~N} / \mathrm{A} \\\hline \text { December 31, 2021 } & 0.158 & 0.158 \\\hline\end{array}$ Required
a. Assume the U.S. company hedges its net investment in the subsidiary by entering a forward contract on January 1, 2021, for December 31, 2021 delivery of kr100,000.
i. Is this hedge a forward purchase or a forward sale? Explain.
ii. Calculate the gain or loss on exposure to the subsidiary, and the loss or gain on the forward contract.
iii. What is the net amount of translation gains or losses, reported in consolidated other comprehensive income for 2021?
b. Assume the U.S. company hedges its net investment in the subsidiary with krone denominated debt in the amount of kr200,000, held throughout 2021.
i. Calculate the gain or loss on the debt.
ii. What is the net amount of translation gains or losses, reported in consolidated other comprehensive income for 2021?