Zerlie's Imports Purchased Automotive Parts from a German Firm on July

Essay

Zerlie's Imports purchased automotive parts from a German firm on July 1, 2016.The parts cost 150,000 Euros to be paid for on August 15.To pay for the parts, Zerlie's Imports borrowed 150,000 euros from a German bank on July 16.The loan bears an 11% interest rate to be repaid on August 15 in euros.
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Another option would have been for Zerlie's to have hedged the purchase with a forward exchange contract on July 1 to buy 150,000 euros at a forward rate of $0.67.Exchange rates were as follows:
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$$\begin{array} { l c } \text { Date } & \text { Spot Rate } \\\hline \text { July } 1,2016 & 1 \mathrm { M } = \$ 0.65 \\\text { July } 16,2016 & 1 \mathrm { M } = \$ 0.60 \\\text { August } 15,2016 & 1 \mathrm { M } = \$ 0.62\end{array}$$ Required:
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a.Compute the effect on net income assuming the following:
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(1)
Zerlie did not borrow to pay for the transaction or hedge the transaction on July 1.?
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(2)
Zerlie borrowed from the German bank on July 16.?
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(3)
Zerlie hedged the full purchase on July 1.?
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** ignore present values and discount rates
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b.Determine which of these three alternatives would have been the best for Zerlie under the situation described.?