All Related Questions of Forward Contract

Q: What is the difference between a forward contract and a futures contract

What is the difference between a forward contract and a futures contract? Why do you think that futures contracts are much more common? Are there any circumstances under which you might prefer to use...

Q: The forward price (F) of a contract on an asset

The forward price (F) of a contract on an asset with neither carrying costs nor convenience yield is the current spot price of the asset (S0) multiplied by 1, plus the appropriate interest rate betwee...

Q: You enter into a forward contract to buy a 10-year

You enter into a forward contract to buy a 10-year, zero coupon bond that will be issued in one year. The face value of the bond is $1,000, and the 1-year and 11-year spot interest rates are 5 percent...

Q: This morning you agreed to buy a one-year Treasury bond

This morning you agreed to buy a one-year Treasury bond in six months. The bond has a face value of $1,000. Use the spot interest rates listed here to answer the following questions: Time EAR...

Q: You are a broker for frozen seafood products for Choyce Products.

You are a broker for frozen seafood products for Choyce Products. You just signed a deal with a Belgian distributor. Under the terms of the contract, in one year you will deliver 4000 kilograms of fro...

Q: On June 1, ACL International, a U.S.

On June 1, ACL International, a U.S. confectionery products manufacturer, purchases on account bulk chocolate from a Swiss supplier for 166,667 Swiss francs (CHF) when the spot rate is $0.90 = CHF 1....

Q: An off-market forward contract is a forward where either you

An off-market forward contract is a forward where either you have to pay a premium or you receive a premium for entering into the contract. (With a standard forward contract, the premium is zero.) Sup...

Q: For Figure 2.6, verify the following:

For Figure 2.6, verify the following: a. The S&R index price at which the call option diagram intersects the x-axis is $1095.68. b. The S&R index price at which the call option and forward c...

Q: For Figure 2.8, verify the following:

For Figure 2.8, verify the following: a. The S&R index price at which the put option diagram intersects the x-axis is $924.32. b. The S&R index price at which the put option and forward cont...

Q: Verify that going long a forward contract and lending the present value

Verify that going long a forward contract and lending the present value of the forward price creates a payoff of one share of stock when a. The stock pays no dividends. b. The stock pays discrete divi...

Q: Golddiggers has zero net income if it sells gold for a price

Golddiggers has zero net income if it sells gold for a price of $380. However, by shorting a forward contract it is possible to guarantee a profit of $40/oz. Suppose a manager decides not to hedge and...

Q: Suppose the S&R index is 800, and that the

Suppose the S&R index is 800, and that the dividend yield is 0. You are an arbitrageur with a continuously compounded borrowing rate of 5.5% and a continuously compounded lending rate of 5%. Assume th...

Q: Suppose XYZ stock pays no dividends and has a current price of

Suppose XYZ stock pays no dividends and has a current price of $50. The forward price for delivery in 1 year is $55. Suppose the 1-year effective annual interest rate is 10%. a. Graph the payoff and p...

Q: Explain how to synthetically create the equity-linked CD in Section

Explain how to synthetically create the equity-linked CD in Section 15.3 by using a forward contract on the S&P index and a put option instead of a call option. (Hint: Use put-call parity. Remembe...

Q: Why would a company prefer a foreign currency option over a forward

Why would a company prefer a foreign currency option over a forward contract in hedging a foreign currency firm commitment? Why would a company prefer a forward contract over an option in hedging a fo...

Q: What are the differences in accounting for a forward contract used as

What are the differences in accounting for a forward contract used as (a) A cash flow hedge and (b) A fair value hedge of a foreign currency denominated asset or liability?

Q: What are the differences in accounting for a forward contract used as

What are the differences in accounting for a forward contract used as a fair value hedge of (a) A foreign currency denominated asset or liability and (b) A foreign currency firm commitment?

Q: What are the differences in accounting for a forward contract used as

What are the differences in accounting for a forward contract used as a cash flow hedge of (a) A foreign currency denominated asset or liability and (b) A forecasted foreign currency transaction?

Q: A U.S. exporter has a Thai baht account receivable

A U.S. exporter has a Thai baht account receivable resulting from an export sale on June 1 to a customer in Thailand. The exporter signed a forward contract on June 1 to sell Thai baht and designated...

Q: St. Philip Company ordered parts costing €100,000 from

St. Philip Company ordered parts costing €100,000 from a foreign supplier on January 15 when the spot rate was $0.20 per €. A one-month forward contract was signed on that date to purchase €100,000 at...

Q: On December 1, 2017, Ringling Company (a U.

On December 1, 2017, Ringling Company (a U.S.-based company) entered into a three-month forward contract to purchase 1,000,000 pesos on March 1, 2018. The following U.S. dollar per peso exchange rates...

Q: Assuming that MNC entered into a forward contract to sell 10 million

Assuming that MNC entered into a forward contract to sell 10 million South Korean won on December 1, 2017, as a fair value hedge of a foreign currency receivable, what is the net impact on its net inc...

Q: On March 1, Pimlico Corporation (a U.S.-

On March 1, Pimlico Corporation (a U.S.-based company) expects to order merchandise from a supplier in Sweden in three months. On March 1, when the spot rate is $0.10 per Swedish krona, Pimlico enters...

Q: What is the net impact on Micro’s net income for the quarter

What is the net impact on Micro’s net income for the quarter ended June 30, 2017, as a result of this forward contract hedge of a firm commitment? a. $–0–. b. $2,400 increase in net income. c. $4,000...

Q: What is the net impact on Micro’s net income for the quarter

What is the net impact on Micro’s net income for the quarter ended September 30, 2017, as a result of this forward contract hedge of a firm commitment? a. $–0–. b. $115,000 increase in net income. c....

Q: What is Micro’s net increase or decrease in cash flow from having

What is Micro’s net increase or decrease in cash flow from having entered into this forward contract hedge? a. $–0–. b. $1,000 increase in cash flow. c. $1,500 decrease in cash flow. d. $2,000 increas...

Q: Brandlin Company of Anaheim, California, sells parts to a foreign

Brandlin Company of Anaheim, California, sells parts to a foreign customer on December 1, 2017, with payment of 16,000 korunas to be received on March 1, 2018. Brandlin enters into a forward contract...

Q: Use the same facts as in Problem 31 except that Brandlin Company

Use the same facts as in Problem 31 except that Brandlin Company purchases materials from a foreign supplier on December 1, 2017, with payment of 16,000 korunas to be made on March 1, 2018. The materi...

Q: On November 1, 2017, Bernard Company (a U.

On November 1, 2017, Bernard Company (a U.S.-based company) sold merchandise to a foreign customer for 100,000 FCUs with payment to be received on April 30, 2018. At the date of sale, Bernard entered...

Q: Eximco Corporation (based in Champaign, Illinois) has a number

Eximco Corporation (based in Champaign, Illinois) has a number of transactions with companies in the country of Mongagua, where the currency is the mong. On November 30, 2017, Eximco sold equipment at...

Q: On October 1, 2017, Sharp Company (based in Denver

On October 1, 2017, Sharp Company (based in Denver, Colorado) entered into a forward contract to sell 100,000 rubles in four months (on January 31, 2018) and receive $39,000 in U.S. dollars. Exchange...

Q: On August 1, Ling-Harvey Corporation (a U.

On August 1, Ling-Harvey Corporation (a U.S.-based importer) placed an order to purchase merchandise from a foreign supplier at a price of 400,000 ringgits. Ling-Harvey will receive and make payment f...

Q: Vino Veritas Company, a U.S.-based importer of

Vino Veritas Company, a U.S.-based importer of wines and spirits, placed an order with a French supplier for 1,000 cases of wine at a price of 200 euros per case. The total purchase price is 200,000 e...

Q: On February 1, 2017, Linber Company forecasted the purchase of

On February 1, 2017, Linber Company forecasted the purchase of component parts on May 1, 2017, at a price of 100,000 euros. On that date, Linber entered into a forward contract to purchase 100,000 eur...

Q: A $50 stock pays a $1 dividend every 3 months

A $50 stock pays a $1 dividend every 3 months, with the first dividend coming 3 months from today. The continuously compounded risk-free rate is 6%. a. What is the price of a prepaid forward contract...

Q: Construct Table 5.1 from the perspective of a seller,

Construct Table 5.1 from the perspective of a seller, providing a descriptive name for each of the transactions.

Q: A $50 stock pays an 8% continuous dividend. The

A $50 stock pays an 8% continuous dividend. The continuously compounded risk free rate is 6%. a. What is the price of a prepaid forward contract that expires 1 year from today? b. What is the price of...

Q: In Example 10.2, a forward contract was used to

In Example 10.2, a forward contract was used to establish a derivatives “hedge” toprotect Centralia from a translation loss if the euro depreciated from â ...

Q: Suppose that you are a U.S.-based importer of

Suppose that you are a U.S.-based importer of goods from the United Kingdom.You expect the value of the pound to increase against the U.S. dollarover the next 30 days. You will be making payment on a...

Q: Lynn Construction enters into a firm purchase commitment for equipment to be

Lynn Construction enters into a firm purchase commitment for equipment to be delivered on June 30, 2013, for a price of 10,000 GBP. It simultaneously signs a forward foreign exchange contract for 10,0...

Q: Kentucky Gold (KG) holds 10,000 gallons of whiskey

Kentucky Gold (KG) holds 10,000 gallons of whiskey in inventory on October 31, 2013, that costs $225 per gallon. KG contemplates selling the whiskey on March 31, 2014, when it completes the aging proc...

Q: Zip purchased merchandise from Tas of Japan on November 1, 2016

Zip purchased merchandise from Tas of Japan on November 1, 2016, for 10,000,000 yen, payable on December 1, 2016. The spot rate for yen on November 1 was $0.0075, and on December 1 the spot rate was $...

Q: Consider the same basic facts as in P12-2, but

Consider the same basic facts as in P12-2, but instead of a forward contract Sue purchases put options to sell 300,000 bushels at $5.20 per bushel. The options cost $0.05 a bushel. REQUIRED: 1. Deter...

Q: Wil has 100,000 units of widgets in its inventory on

Wil has 100,000 units of widgets in its inventory on October 1, 2016. Wil purchased them for $1 per unit one month ago. It hedges the value of the widgets by entering into a forward contract to sell 1...

Q: On December 12, 2016, Car entered into three forward exchange

On December 12, 2016, Car entered into three forward exchange contracts, each to purchase 100,000 Canadian dollars in 90 days. Assume a 12 percent interest rate. The relevant exchange rates are as fol...

Q: On April 1, 2016, Win of Canada ordered customized fittings

On April 1, 2016, Win of Canada ordered customized fittings from Ace, a U.S. firm, to be delivered on May 31, 2016, at a price of 50,000 Canadian dollars. The spot rate for Canadian dollars on April 1...

Q: On December 1, 2016, Jol Company enters into a 90

On December 1, 2016, Jol Company enters into a 90-day forward contract with a rice speculator to purchase 500 tons of rice at $1,000 per ton. Jol enters into this contract in order to hedge an anticip...

Q: Refer to Exercise E 13-1 and assume that Jol enters

Refer to Exercise E 13-1 and assume that Jol enters into the forward contract to hedge a firm purchase commitment. Repeat parts 1 and 2 under this assumption. Data from Exercise E 13-1 On December 1...

Q: Brk signs a firm sales commitment with Riv. The contract is

Brk signs a firm sales commitment with Riv. The contract is to sell 100,000 widgets deliverable in three months, on January 31, 2017, at the prevailing market price of widgets at that date. On Novembe...

Q: On April 1, 2016, Bay delivers merchandise to Ram for

On April 1, 2016, Bay delivers merchandise to Ram for 200,000 pesos when the spot rate for pesos is 6.0496 pesos. The receivable from Ram is due May 31. Also on April 1, Bay hedges its foreign currenc...

Q: On October 2, 2016, Flx, a U.S

On October 2, 2016, Flx, a U.S. company, entered into a forward contract to purchase 50,000 euros for delivery in 180 days at a forward rate of $0.6350. The forward contract is a derivative instrument...

Q: Bat, a U.S. corporation, anticipates a contract

Bat, a U.S. corporation, anticipates a contract based on December 2, 2016, discussions to sell heavy equipment to Ram of Scotland for 500,000 British pounds. The equipment is likely to be delivered an...

Q: Mar, a U.S. firm, purchased equipment for

Mar, a U.S. firm, purchased equipment for 400,000 British pounds from Thc on December 16, 2016. The terms were n/30, payable in British pounds. On December 16, 2016, Mar also entered into a 30-day for...

Q: Suppose that your company will be receiving 30 million euros six months

Suppose that your company will be receiving 30 million euros six months from now and the euro is currently selling for 1 euro per dollar. If you want to hedge the foreign exchange risk in this payment...

Q: If the pension fund you manage expects to have an inflow of

If the pension fund you manage expects to have an inflow of $120 million six months from now, what forward contract would you seek to enter into to lock in current interest rates?

Q: If the portfolio you manage is holding $25 million of 6s

If the portfolio you manage is holding $25 million of 6s of 2032 Treasury bonds with a price of 110, what forward contract would you enter into to hedge the interest-rate risk on these bonds over the...

Q: A portfolio manager is interested in purchasing an instrument with a call

A portfolio manager is interested in purchasing an instrument with a call option-like payoff but does not want to have to pay money up front. The manager learns from a banker that one can do this by e...

Q: Suppose that a firm plan to purchase an asset at a future

Suppose that a firm plan to purchase an asset at a future date. The forward price of the asset is $200,000. It hedges that purchase by buying a forward contract at a price of $205,000. During the hedg...

Q: Consider a call option on an asset with an exercise price of

Consider a call option on an asset with an exercise price of $100, a put option on that same asset with an exercise price of $100, and a forward contract on the asset with an exercise price of $100, a...

Q: Assume that there is a forward market for a commodity. The

Assume that there is a forward market for a commodity. The forward price of the commodity is $45. The contract expires in one year. The risk-free rate is 10 percent. Now six months later, the spot pri...

Q: Solve for the price of a forward contract on a generic asset

Solve for the price of a forward contract on a generic asset that expires on September 10 whose spot price as of June 10 is $45, assuming that the annually compounded risk-free rate is 6.01 percent.

Q: Assume the 30-day LIBOR is 5 percent and the 120

Assume the 30-day LIBOR is 5 percent and the 120-day LIBOR is 6 percent. This implies a continuously compounded 90-day forward rate of 6.3448 percent. Verify this result and explain what happens to th...

Q: Merit & Family purchased engines from Canada for 30,000 Canadian

Merit & Family purchased engines from Canada for 30,000 Canadian dollars on March 10 with payment due on June 8. Also, on March 10, Merit acquired a 90-day forward contract to purchase 30,000 Cana...

Q: Avanti Corporation is a small Midwestern company that manufactures wooden furniture.

Avanti Corporation is a small Midwestern company that manufactures wooden furniture. Tim Martin, Avanti’s president, has decided to expand operations significantly and has entered into a contract with...

Q: On December 1, 20X1, Sycamore Company acquired a 90-

On December 1, 20X1, Sycamore Company acquired a 90-day speculative forward contract to sell €120,000 at a forward rate of €1 = $0.58. The rat...

Q: Nick Andros of Streamline Company suggested that the company speculate in foreign

Nick Andros of Streamline Company suggested that the company speculate in foreign currency as a partial hedge against its operations in the cattle market, which fluctuates like a commodity market. On...

Q: Select the correct answer for each of the following questions.

Select the correct answer for each of the following questions. 1. The following information applies to Denton Inc.’s sale of 10,000 foreign currency units under a forward co...

Q: Pumped Up Company purchased equipment from Switzerland for 140,000 francs

Pumped Up Company purchased equipment from Switzerland for 140,000 francs on December 16, 20X7, with payment due on February 14, 20X8. On December 16, 20X7, Pumped Up also acquired a 60-day forward co...

Q: Alman Company sold pharmaceuticals to a Swedish company for 200,000

Alman Company sold pharmaceuticals to a Swedish company for 200,000 kronor (SKr) on April 20, with settlement to be in 60 days. On the same date, Alman entered into a 60-day forward contract to sell 2...

Q: Jerber Electronics Inc. sold electrical equipment to a Dutch company for

Jerber Electronics Inc. sold electrical equipment to a Dutch company for 50,000 guilders (G) on May 14, with collection due in 60 days. On the same day, Jerber entered into a 60-day forward contract t...

Q: On November 1, 20X6, Smith Imports Inc. contracted to

On November 1, 20X6, Smith Imports Inc. contracted to purchase teacups from England for £30,000. The teacups were to be delivered on January 30, 20X7, with payment due on March 1, 20X7. O...

Q: Riverside Clippers Corp manufactures garden tools in a factory in Taneytown,

Riverside Clippers Corp manufactures garden tools in a factory in Taneytown, Maryland. Recently, the company designed a collection of tools for professional use rather than consumer use. Management ne...

Q: Match the items in the left-hand column with the descriptions

Match the items in the left-hand column with the descriptions/explanations in the right-hand column.

Q: Jon-Jan Restaurants purchased green rice, a special variety of

Jon-Jan Restaurants purchased green rice, a special variety of rice, from China for 100,000 renminbi on November 1, 20X8. Payment is due on January 30, 20X9. On November 1, 20X8, the company also ente...

Q: Tex Hardware sells many of its products overseas. The following are

Tex Hardware sells many of its products overseas. The following are some selected transactions. Tex sold electronic subassemblies to a firm in Denmark for 120,000 Danish kroner (Dkr) on June 6, when t...

Q: Globe Shipping, a U.S. company, is an

Globe Shipping, a U.S. company, is an importer and exporter. The following are some transactions with foreign companies. Globe sold blue jeans to a South Korean importer on January 15 for $7,400, w...

Q: On December 1, 20X1, Micro World Inc. entered into

On December 1, 20X1, Micro World Inc. entered into a 120-day forward contract to purchase 100,000 Australian dollars (A$). Micro World’s fiscal year ends on December 31. The direct e...

Q: Part I Maple Company had the following export and import transactions

Part I Maple Company had the following export and import transactions during 20X5: On March 1, Maple sold goods to a Canadian company for C$30,000, receivable on May 30. The spot rates for Canadi...

Q: Dexter Inc. had the following items in its unadjusted and adjusted

Dexter Inc. had the following items in its unadjusted and adjusted trial balances at December 31, 20X5: Additional Information: On December 1, 20X5, Dexter sold goods to a company in Austr...

Q: Kiwi Painting Company engages in a number of foreign currency transactions in

Kiwi Painting Company engages in a number of foreign currency transactions in euros (€). For each of the following independent transactions, determine the dollar amount to be reported...

Q: A company enters into a forward contract with a bank to sell

A company enters into a forward contract with a bank to sell a foreign currency for K1 at time T1. The exchange rate at time T1 proves to be S1 (> K1). The company asks the bank if it can roll the con...

Q: Suppose the USD/euro exchange rate is 1.3000.

Suppose the USD/euro exchange rate is 1.3000. The exchange rate volatility is 15%. A U.S. company will receive 1 million euros in three months. The euro and USD risk free rates are 5% and 4%, respecti...

Q: Trader A enters into futures contracts to buy 1 million euros for

Trader A enters into futures contracts to buy 1 million euros for 1.1 million dollars in three months. Trader B enters in a forward contract to do the same thing. The exchange rate (dollars per euro)...

Q: What position is equivalent to a long forward contract to buy an

What position is equivalent to a long forward contract to buy an asset at K on a certain date and a put option to sell it for K on that date.

Q: Some time ago a company entered into a forward contract to buy

Some time ago a company entered into a forward contract to buy £1 million for $1.5 million. The contract now has 6 months to maturity. The daily volatility of a 6-month zero-coupon sterling bond (when...

Q: What is the difference between entering into a long forward contract when

What is the difference between entering into a long forward contract when the forward price is $50 and taking a long position in a call option with a strike price of $50?

Q: An investor enters into a short forward contract to sell 100,

An investor enters into a short forward contract to sell 100,000 British pounds for U.S. dollars at an exchange rate of 1.5000 USD per pound. How much does the investor gain or lose if the exchange ra...

Q: Does a forward contract on a stock index have the same delta

Does a forward contract on a stock index have the same delta as the corresponding futures contract? Explain your answer.

Q: Trader A enters into a forward contract to buy an asset for

Trader A enters into a forward contract to buy an asset for $1,000 in one year. Trader B buys a call option to buy the asset for $1,000 in one year. The cost of the option is $100. What is the differe...

Q: Explain how a forward contract to sell foreign currency is mapped into

Explain how a forward contract to sell foreign currency is mapped into a portfolio of zero-coupon bonds with standard maturities for the purposes of a VaR calculation.

Q: Suppose that you enter into a 6-month forward contract on

Suppose that you enter into a 6-month forward contract on a non-dividend-paying stock when the stock price is $30 and the risk-free interest rate (with continuous compounding) is 5% per annum. What is...

Q: A U.S. company expects to have to pay 1

A U.S. company expects to have to pay 1 million Canadian dollars in 6 months. Explain how the exchange rate risk can be hedged using (a) a forward contract and (b) an option.

Q: When a known future cash outflow in a foreign currency is hedged

When a known future cash outflow in a foreign currency is hedged by a company using a forward contract, there is no foreign exchange risk. When it is hedged using futures contracts, the daily settleme...

Q: A trader enters into a short forward contract on 100 million yen

A trader enters into a short forward contract on 100 million yen. The forward exchange rate is $0.0090 per yen. How much does the trader gain or lose if the exchange rate at the end of the contract is...

Q: A 1-year long forward contract on a non-dividend

A 1-year long forward contract on a non-dividend-paying stock is entered into when the stock price is $40 and the risk-free rate of interest is 5% per annum with continuous compounding. (a) What are t...

Q: Describe the profit from the following portfolio: a long forward contract

Describe the profit from the following portfolio: a long forward contract on an asset and a long European put option on the asset with the same maturity as the forward contract and a strike price tha...

Q: A stock is expected to pay a dividend of $1 per

A stock is expected to pay a dividend of $1 per share in 2 months and in 5 months. The stock price is $50, and the risk-free rate of interest is 8% per annum with continuous compounding for all maturi...

Q: A company that is uncertain about the exact date when it will

A company that is uncertain about the exact date when it will pay or receive a foreign currency may try to negotiate with its bank a forward contract that specifies a period during which delivery can...

Q: Describe the terminal value of the following portfolio: a newly entered

Describe the terminal value of the following portfolio: a newly entered-into long forward contract on an asset and a long position in a European put option on the asset with the same maturity as the f...

Q: How can a forward contract on a stock with a particular delivery

How can a forward contract on a stock with a particular delivery price and delivery date be created from options?

Q: On July 1, 2017, a company enters into a forward

On July 1, 2017, a company enters into a forward contract to buy 10 million Japanese yen on January 1, 2018. On September 1, 2017, it enters into a forward contract to sell 10 million Japanese yen on...

Q: What is the difference between a forward contract and a futures contract

What is the difference between a forward contract and a futures contract?

Q: Refer to Practice 19-3 and Practice 19-4.

Refer to Practice 19-3 and Practice 19-4. What would be the impact on the golf course developer’s total cash payment to purchase trees in Year 2 if the forward contract had been for just 1,500 trees r...

Q: On December 1 of Year 1, the company made a $

On December 1 of Year 1, the company made a $100,000 investment in a highly risky Internet stock. The investment is classified as a trading security. Part of the investment agreement prevents the comp...

Q: Refer to Practice 19-3. Make any necessary journal entry

Refer to Practice 19-3. Make any necessary journal entry on the golf course developer’s books on December 31 of Year 1 in connection with the tree forward contract, assuming that the price per tree on...

Q: The company is a golf course developer that constructs approximately 15 courses

The company is a golf course developer that constructs approximately 15 courses per year. Next year, the company will buy 5,000 trees to install in the courses it builds. In recent years, the price of...

Q: Refer to Practice 19-3 and complete the following:

Refer to Practice 19-3 and complete the following: 1. Compute the total amount (including all forward-related cash flows) that the golf course developer will pay to buy 5,000 trees in Year 2, assuming...

Q: The forward price (F) of a contract on an asset

The forward price (F) of a contract on an asset with neither carrying costs nor convenience yield is the current spot price of the asset (S 0) multiplied by 1, plus the appropriate interest rate betwe...

Q: You enter into a forward contract to buy a 10-year

You enter into a forward contract to buy a 10-year, zero coupon bond that will be issued in one year. The face value of the bond is $1,000, and the 1-year and 11-year spot interest rates are 5 percent...

Q: This morning you agreed to buy a one-year Treasury bond

This morning you agreed to buy a one-year Treasury bond in six months. The bond has a face value of $1,000. Use the spot interest rates listed here to answer the following questions: a. What is the...

Q: What is the difference between a forward contract and a futures contract

What is the difference between a forward contract and a futures contract? Why do you think that futures contracts are much more common? Are there any circumstances under which you might prefer to use...

Q: Assuming a forward contract to sell 100,000 Israeli shekels was

Assuming a forward contract to sell 100,000 Israeli shekels was entered into on December 1, Year 1, as a fair value hedge of a foreign currency receivable, what would be the net impact on net income i...

Q: What are the differences in accounting for a forward contract used as

What are the differences in accounting for a forward contract used as a cash flow hedge of (a) a foreign-currency-denominated asset or liability and (b) a forecasted foreign currency transaction?

Q: Why might a company prefer a foreign currency option rather than a

Why might a company prefer a foreign currency option rather than a forward contract in hedging a foreign currency firm commitment? Why might a company prefer a forward contract over an option in hedgi...

Q: How is the fair value of a foreign currency forward contract determined

How is the fair value of a foreign currency forward contract determined? How is the fair value of an option determined?

Q: On December 1, Year 1, Tackett Company (a U

On December 1, Year 1, Tackett Company (a U.S.-based company) entered into a three-month forward contract to purchase 1 million Mexican pesos on March 1, Year 2. The following U.S. dollar per peso exc...

Q: Assuming no forward contract was entered into, how much foreign exchange

Assuming no forward contract was entered into, how much foreign exchange gain or loss should Reiter report on its Year 1 income statement with regard to this transaction? a. A $5,000 gain. b. A $3,000...

Q: Zorba Company, a U.S.-based importer of specialty

Zorba Company, a U.S.-based importer of specialty olive oil, placed an order with a foreign supplier for 500 cases of olive oil at a price of 100 crowns per case. The total purchase price is 50,000 cr...

Q: The Budvar Company sells parts to a foreign customer on December 1

The Budvar Company sells parts to a foreign customer on December 1, Year 1, with payment of 20,000 crowns to be received on March 1, Year 2. Budvar enters into a forward contract on Decemb...

Q: The same facts apply as in Exercise 14 except that Budvar Company

The same facts apply as in Exercise 14 except that Budvar Company purchases parts from a foreign supplier on December 1, Year 1, with payment of 20,000 crowns to be made on March 1, Year 2. On Decembe...

Q: On November 1, Year 1, Alexandria Company sold merchandise to

On November 1, Year 1, Alexandria Company sold merchandise to a foreign customer for 100,000 francs with payment to be received on April 30, Year 2. At the date of sale, Alexandria Company entered int...

Q: Artco Inc. engages in various transactions with companies in the country

Artco Inc. engages in various transactions with companies in the country of Santrica. On November 30, Year 1, Artco sold artwork at a price of 400,000 ricas to a Santrican customer, with payment to be...

Q: On October 1, Year 1, Butterworth Company entered into a

On October 1, Year 1, Butterworth Company entered into a forward contract to sell 100,000 rupees in four months (on January 31, Year 2). Relevant exchange rates for the rupee are as follows: Butterw...

Q: On August 1, Year 1, Huntington Corporation placed an order

On August 1, Year 1, Huntington Corporation placed an order to purchase merchandise from a foreign supplier at a price of 100,000 dinars. The merchandise is received and paid for on October 31, Year 1...

Q: What are the differences in accounting for a forward contract used as

What are the differences in accounting for a forward contract used as (a) a cash flow hedge and (b) a fair value hedge of a foreign-currency-denominated asset or liability?

Q: What are the differences in accounting for a forward contract used as

What are the differences in accounting for a forward contract used as a fair value hedge of (a) a foreign-currency-denominated asset or liability and (b) a foreign currency firm commitment?

Q: What are the differences in accounting for a forward contract used as

What are the differences in accounting for a forward contract used as a fair value hedge of (a) a foreign currency denominated asset or liability and (b) a foreign currency firm commitment?

Q: What are the differences in accounting for a forward contract used as

What are the differences in accounting for a forward contract used as a cash flow hedge of (a) a foreign currency denominated asset or liability and (b) a forecasted foreign currency transaction?

Q: On December 1, 2017, Ringling Company (a U.

On December 1, 2017, Ringling Company (a U.S.-based company) entered into a three-month forward contract to purchase 1,000,000 pesos on March 1, 2018. The following U.S. dollar per peso exchange rates...

Q: MNC Corp. (a U.S.-based company)

MNC Corp. (a U.S.-based company) sold parts to a South Korean customer on December 1, 2017, with payment of 10 million South Korean won to be received on March 31, 2018. The following exchange rates a...

Q: On March 1, Pimlico Corporation (a U.S.-

On March 1, Pimlico Corporation (a U.S.-based company) expects to order merchandise from a supplier in Sweden in three months. On March 1, when the spot rate is $0.10 per Swedish krona, Pimlico enters...

Q: On June 1, 2017, Micro Corp. received an order

On June 1, 2017, Micro Corp. received an order for parts from a Mexican customer at a price of 1,000,000 Mexican pesos with a delivery date of July 31, 2017. On June 1, when the U.S. dollar–Mexican pe...

Q: On June 1, 2017, Micro Corp. received an order

On June 1, 2017, Micro Corp. received an order for parts from a Mexican customer at a price of 1,000,000 Mexican pesos with a delivery date of July 31, 2017. On June 1, when the U.S. dollar–Mexican pe...

Q: On June 1, 2017, Micro Corp. received an order

On June 1, 2017, Micro Corp. received an order for parts from a Mexican customer at a price of 1,000,000 Mexican pesos with a delivery date of July 31, 2017. On June 1, when the U.S. dollar–Mexican pe...

Q: St. Philip Company ordered parts costing €100,000 from

St. Philip Company ordered parts costing €100,000 from a foreign supplier on January 15 when the spot rate was $0.20 per €. A one-month forward contract was signed on that date to purchase €100,000 at...

Q: On February 1, 2017, Linber Company forecasted the purchase of

On February 1, 2017, Linber Company forecasted the purchase of component parts on May 1, 2017, at a price of 100,000 euros. On that date, Linber entered into a forward contract to purchase 100,000 eur...

Q: Brandlin Company of Anaheim, California, sells parts to a foreign

Brandlin Company of Anaheim, California, sells parts to a foreign customer on December 1, 2017, with payment of 16,000 korunas to be received on March 1, 2018. Brandlin enters into a forward contract...

Q: Use the same facts as in Problem 31 except that Brandlin Company

Use the same facts as in Problem 31 except that Brandlin Company purchases materials from a foreign supplier on December 1, 2017, with payment of 16,000 korunas to be made on March 1, 2018. The materi...

Q: On November 1, 2017, Bernard Company (a U.

On November 1, 2017, Bernard Company (a U.S.-based company) sold merchandise to a foreign customer for 100,000 FCUs with payment to be received on April 30, 2018. At the date of sale, Bernard entered...

Q: Eximco Corporation (based in Champaign, Illinois) has a number

Eximco Corporation (based in Champaign, Illinois) has a number of transactions with companies in the country of Mongagua, where the currency is the mong. On November 30, 2017, Eximco sold equipment at...

Q: On October 1, 2017, Sharp Company (based in Denver

On October 1, 2017, Sharp Company (based in Denver, Colorado) entered into a forward contract to sell 100,000 rubles in four months (on January 31, 2018) and receive $39,000 in U.S. dollars. Exchange...

Q: On August 1, Ling-Harvey Corporation (a U.

On August 1, Ling-Harvey Corporation (a U.S.-based importer) placed an order to purchase merchandise from a foreign supplier at a price of 400,000 ringgits. Ling-Harvey will receive and make payment f...

Q: Vino Veritas Company, a U.S.-based importer of

Vino Veritas Company, a U.S.-based importer of wines and spirits, placed an order with a French supplier for 1,000 cases of wine at a price of 200 euros per case. The total purchase price is 200,000 e...

Q: Lynn Construction enters into a firm purchase commitment for equipment to be

Lynn Construction enters into a firm purchase commitment for equipment to be delivered on June 30, 2017, for a price of 10,000 GBP. It simultaneously signs a forward foreign exchange contract for 10,0...

Q: Kentucky Gold (KG) holds 10,000 gallons of whiskey

Kentucky Gold (KG) holds 10,000 gallons of whiskey in inventory on October 31, 2017, that costs $225 per gallon. KG contemplates selling the whiskey on March 31, 2018, when it completes the aging proc...

Q: Clayton Industries sells medical equipment worldwide. On March 1 of the

Clayton Industries sells medical equipment worldwide. On March 1 of the current year, the company sold equipment, with a cost of $160,000, to a foreign customer for 200,000 euros payable in 60 days. A...

Q: Jarvis Corporation transacts business with a number of foreign vendors and customers

Jarvis Corporation transacts business with a number of foreign vendors and customers. These transactions are denominated in FC, and the company uses a number of hedging strategies to reduce the exposu...

Q: Kaiser Exporters buys used medical equipment and sells it to various foreign

Kaiser Exporters buys used medical equipment and sells it to various foreign health care institutions. On June 15, the company committed to sell medical equipment to a foreign hospital for 800,000 FC....

Q: Medical Distributors, Inc., is a U.S. company

Medical Distributors, Inc., is a U.S. company that buys and sells used medical equipment throughout the United States and Canada. During the month of June, the company had the following transactions w...

Q: In the process of preparing a budget for the second quarter of

In the process of preparing a budget for the second quarter of the current fiscal year, Anderson Welding, Inc., has forecasted foreign sales of 1,200,00 foreign currency (FC). The company is concerned...

Q: A company has acquired two derivatives: an option to buy foreign

A company has acquired two derivatives: an option to buy foreign currency (FC) and a forward contract to buy FC. Both derivatives were acquired on the same day, for the same notional amount and expire...

Q: Stark, Inc., placed an order for inventory costing 500,

Stark, Inc., placed an order for inventory costing 500,000 FC with a foreign vendor on April 15 when the spot rate was 1 FC = $0.683. Stark received the goods on May 1 when the spot rate was 1 FC = $0...

Q: Jackson, a U.S. company, acquires a variety

Jackson, a U.S. company, acquires a variety of raw materials from foreign vendors with amounts payable in foreign currency (FC). The company needs to acquire 20,000 units of raw materials, and the goo...

Q: Regber International is building an addition to one of its overseas manufacturing

Regber International is building an addition to one of its overseas manufacturing facilities with all construction costs being paid in foreign currency (FC) as follows: 200,000 FC, 300,000 FC, 400,000...

Q: In the past, Baxter Manufacturing has engaged in a number of

In the past, Baxter Manufacturing has engaged in a number of foreign currency transactions but has never before attempted to hedge these transactions. Baxter has given you three past events and asked...

Q: Explain how both the intrinsic value and the time value are measured

Explain how both the intrinsic value and the time value are measured for a forward contract to sell and for a put option.

Q: A U.S. company purchases inventory from a foreign vendor

A U.S. company purchases inventory from a foreign vendor, and purchases are denominated in the foreign currency (FC). The U.S. dollar is expected to weaken against the FC. Explain how a forward contra...

Q: The chief financial officer (CFO) of Baxter International has employed

The chief financial officer (CFO) of Baxter International has employed the use of hedges in a variety of contexts over the first quarter of the current calendar year as follows: Futures Contract&md...

Q: In several instances, Neibler Corporation has been engaged in transactions that

In several instances, Neibler Corporation has been engaged in transactions that were denominated or settled in foreign currencies (FC). Given recent volatility in exchange rates between the U.S. dol...

Q: Newton Grains plans to sell 100,000 bushels of corn from

Newton Grains plans to sell 100,000 bushels of corn from its current inventory in March 2018. The company paid $1 million for the corn during the fall 2017 harvest season. On October 1, 2017, Newton w...

Q: The CFO at Brosnan, Inc., a book publisher, is

The CFO at Brosnan, Inc., a book publisher, is concerned about the rising prices of paper and ink. She is considering the use of derivatives to lock in today’s prices. Required: 1. One strategy used...

Q: Silverado Inc. buys titanium from a supplier that requires a six

Silverado Inc. buys titanium from a supplier that requires a six-month firm commitment on all purchases. On January 1, 2017, Silverado signs a contract with the supplier to purchase 10,000 pounds of t...

Q: Suppose that you have 50 years of temperature data at your disposal

Suppose that you have 50 years of temperature data at your disposal. Explain carefully the analyses you would carry out to value a forward contract on the cumulative CDD for a particular month.

Q: ‘‘A long forward contract subject to credit risk is a combination

‘‘A long forward contract subject to credit risk is a combination of a short position in a no-default put and a long position in a call subject to credit risk.’’ Explain this statement.

Q: Calculate DVA in Example 24.6. Assume that default can

Calculate DVA in Example 24.6. Assume that default can happen in the middle of each month. The default probability of the bank is 0.001 per month for the two years and the recovery rate in the event o...

Q: How is a typical natural gas forward contract structured?

How is a typical natural gas forward contract structured?

Q: On July 15, 2016, you convert 500,000 U

On July 15, 2016, you convert 500,000 U.S. dollars to Japanese yen in the spot foreign exchange market and purchase a six-month forward contract to convert yen into dollars. How much will you receive...

Q: On December 1, 2014, King Company exported equipment that had

On December 1, 2014, King Company exported equipment that had cost $210,000 to a Brazilian company for 1,000,000 real. The account is to be settled on January 31, 2015. King Company is a calendar-year...

Q: Currency exchange rate fluctuations may impact Mattel’s results of operations and cash

Currency exchange rate fluctuations may impact Mattel’s results of operations and cash flows. Mattel’s currency transaction exposures include gains and losses realized on unhedged inventory purchases...

Q: Apple Company was incorporated in Delaware in 2012. On November 2

Apple Company was incorporated in Delaware in 2012. On November 2, 2014, the controller of the company entered into a forward contract to sell 50,000 British pounds for $1.5920 on March 1, 2015. The f...

Q: Citron Company is a U.S.-based citrus grower.

Citron Company is a U.S.-based citrus grower. On October 1, 2014, the company entered into a contract to ship 25,000 boxes of grapefruit on January 28 to Japan. Payment of 50,100,000 yen is to be rece...

Q: ASI recently completed the development and installation of an accounting information system

ASI recently completed the development and installation of an accounting information system for a company located in Rio De Janeiro, Brazil. The company considered that all revenue realization criteri...

Q: Vanderbilt Clothing Company placed a clothing order with a company located in

Vanderbilt Clothing Company placed a clothing order with a company located in Taiwan. The order was placed on November 1, 2014, for delivery on May 1, 2015. Vanderbilt agreed to pay for the goods on M...

Q: Sharon Myers, chief finance officer for Sitco Products, convinced the

Sharon Myers, chief finance officer for Sitco Products, convinced the president of the company to enter into a 90-day forward contract to sell 900,000 Swedish kronas as a speculative venture. When the...

Q: Use the data given in Exercise 12-9, except assume

Use the data given in Exercise 12-9, except assume that on November 1, Sitco Products entered into a 90-day forward contract to buy 900,000 Swedish kronas on January 30 for $.5085 per krona. Exercise...

Q: On November 15, 2014, Solanski Inc. imported 500,

On November 15, 2014, Solanski Inc. imported 500,000 barrels of oil from an oil company in Venezuela. Solanski agreed to pay 50,000,000 bolivars on January 15, 2015. To ensure that the dollar outlay f...

Q: Consider the following information: 1. On December 1,

Consider the following information: 1. On December 1, 2014, a U.S. firm plans to purchase a piece of equipment (with an asking price of 100,000 francs) in Switzerland during January of 2015. The trans...

Q: Consider the following information: 1. On December 1,

Consider the following information: 1. On December 1, 2014, a U.S. firm contracts to sell equipment (with an asking price of 1,000,000 pesos) in Mexico. The firm will take delivery and will pay for th...

Q: Consider the following information: 1. On December 1,

Consider the following information: 1. On December 1, 2011, a U.S. firm plans to sell a piece of equipment [with an asking price of 200,000 units of a foreign currency (FC)] during January of 2012. Th...

Q: On October 1, 2014, Fairchange Corporation ordered some equipment from

On October 1, 2014, Fairchange Corporation ordered some equipment from a supplier for 300,000 euros. Delivery and payment are to occur on November 15, 2014. The spot rates on October 1 and November 15...

Q: On October 1, 2014, Fairchange Corporation ordered some equipment from

On October 1, 2014, Fairchange Corporation ordered some equipment from a supplier for 300,000 euros. Delivery is to occur on November 15, 2014, while payment is expected to occur on December 15, 2014....

Q: Crystal Exporting Co. is a U.S. wholesaler engaged

Crystal Exporting Co. is a U.S. wholesaler engaged in foreign trade. The following transactions are representative of its business dealings. The company uses a periodic inventory system and is on a ca...

Q: Centennial Exchange of St. Louis, Missouri, imports and exports

Centennial Exchange of St. Louis, Missouri, imports and exports grains. The company has a September 30 fiscal year-end. The periodic inventory system and the weighted-average cost flow method are used...

Q: On December 1, 2014, Tuscano Corp. entered into a

On December 1, 2014, Tuscano Corp. entered into a transaction to import raw materials from a foreign company. The account is to be settled on February 1 with the payment of 60,000 foreign currency uni...

Q: Select the best answer for each of the following. 1

Select the best answer for each of the following. 1. A forward contract is a hedge of an identifiable foreign currency commitment if (a) The forward contract is designated as, and is effective as, a h...

Q: In each of the following cases, indicate whether it would be

In each of the following cases, indicate whether it would be appropriate for an FI to buy or sell a forward contract to hedge the appropriate risk. a. A commercial bank plans to issue CDs in three mon...

Q: Estimate the capital required under Basel I for a bank that has

Estimate the capital required under Basel I for a bank that has the following transactions with another bank. Assume no netting. (a) A two-year forward contract on a foreign currency, currently worth...

Q: A bank has the following transaction with a AA-rated corporation

A bank has the following transaction with a AA-rated corporation: (a) A two-year interest rate swap with a principal of $100 million that is worth $3 million. (b) A nine-month foreign exchange forward...

Q: What position is equivalent to a long forward contract to buy an

What position is equivalent to a long forward contract to buy an asset at K on a certain date and a long position in a European put option to sell it for K on that date?

Q: Refer to Examples 15 and 19 in the chapter. Delmar holds

Refer to Examples 15 and 19 in the chapter. Delmar holds 10,000 gallons of whiskey in inventory on October 31, 2013, that costs $225 per gallon. Delmar contemplates selling the whiskey on March 31, 20...

Q: On July 1, 2013, Owens Corporation places an order with

On July 1, 2013, Owens Corporation places an order with a European supplier for manufacturing equipment for delivery on June 30, 2014. The purchase is denominated in euros in the amount of â ...

Q: On September 1, 2013, Turner Corporation places an order with

On September 1, 2013, Turner Corporation places an order with a Japanese supplier for manufacturing equipment for delivery on June 30, 2014. The purchase is denominated in Japanese yen in the amount o...

Q: On October 1, 2013, Biddle Corporation purchases equipment from a

On October 1, 2013, Biddle Corporation purchases equipment from a supplier in France on account at a purchase price of €40,000 and denominates the transaction in euros. Biddle Corpora...

Q: Tex Hardware sells many of its products overseas. The following are

Tex Hardware sells many of its products overseas. The following are some selected transactions. 1. Tex sold electronic subassemblies to a firm in Denmark for 120,000 Danish kroner (Dkr) on June 6, whe...

Q: Globe Shipping, a U.S. company, is an

Globe Shipping, a U.S. company, is an importer and exporter. The following are some transactions with foreign companies. 1. Globe sold blue jeans to a South Korean importer on January 15 for $7,400, w...

Q: Maple Company had the following export and import transactions during 20X5:

Maple Company had the following export and import transactions during 20X5: 1. On March 1, Maple sold goods to a Canadian company for C$30,000, receivable on May 30. The spot rates for Canadian dollar...

Q: Match the items in the left-hand column with the descriptions

Match the items in the left-hand column with the descriptions/explanations in the right-hand column.

Q: On December 1, 20X1, Micro World Inc. entered into

On December 1, 20X1, Micro World Inc. entered into a 120-day forward contract to sell 100,000 Australian dollars (A$). Micro World’s fiscal year ends on December 31. The direct excha...

Q: Jerber Electronics Inc. sold electrical equipment to a Dutch company for

Jerber Electronics Inc. sold electrical equipment to a Dutch company for 50,000 guilders (G) on May 14, with collection due in 60 days. On the same day, Jerber entered into a 60-day forward contract t...

Q: A indicates that the item relates to Appendix 11A. On

A indicates that the item relates to Appendix 11A. On November 1, 20X6, Smith Imports Inc. contracted to purchase teacups from England for £30,000. The teacups were to be delivered on Jan...

Q: Select the correct answer for each of the following questions.

Select the correct answer for each of the following questions. 1. The following information applies to Denton Inc.’s sale of 10,000 foreign currency units under a forward contract da...

Q: Columbia Corp. has just made a sale to a British customer

Columbia Corp. has just made a sale to a British customer. The sale was for a total value of £135,000 and is to be paid 60 days from now. Columbia is concerned that the British pound will depreciate a...

Q: Crane, Inc., sold equipment to an Irish firm and will

Crane, Inc., sold equipment to an Irish firm and will receive €1,319,405 in 30 days. If the company entered a forward contract to sell at the 30-day forward rate of $1.0812/€, what is the dollar reven...

Q: The Wall Street Journal reported the following spot and forward rates for

The Wall Street Journal reported the following spot and forward rates for the Swiss franc ($/SF): a. Was the Swiss franc selling at a discount or premium in the forward market? b. What was the 30-da...

Q: Suppose the spot exchange rate is C$1.4665 per

Suppose the spot exchange rate is C$1.4665 per euro, while the six‐month forward rate is C$1.50 per euro. What will be the profit for an investor who assumes a €100,000 long position in the forward co...

Q: Assume an investor takes a €100,000 short position in

Assume an investor takes a €100,000 short position in the six‐month euro forward contract with forward rate of C$1.50 per euro. Determine the investor ’ s profit (loss) if the spot rate in six months...

Q: CanComp has a contract to deliver a large computer system to a

CanComp has a contract to deliver a large computer system to a South African company in one year and would like to hedge the currency risk. CanComp will receive payment of R3.5 million (the currency o...

Q: When would a speculator assume a long position in a forward contract

When would a speculator assume a long position in a forward contract on an underlying asset? When would a speculator assume a short position?

Q: When would a hedger assume a long position in a forward contract

When would a hedger assume a long position in a forward contract on an underlying asset? When would a hedger assume a short position?

Q: 1. Which of the following statements is false? a

1. Which of the following statements is false? a. A spot price is a price today for immediate delivery. b. If a Canadian firm has to pay U.S. dollars in the future, it worries about the potential depr...

Q: Which contract is more likely not to be performed, a payment

Which contract is more likely not to be performed, a payment due from a customer in foreign currency (a currency exposure), or a forward contract with a bank to exchange the foreign currency for the f...

Q: Theoretically, shouldn't forward contract hedges and money market hedges have the

Theoretically, shouldn't forward contract hedges and money market hedges have the same identical outcome? Don't they both use the same three specific inputs – the initial spot rate, the domestic cost...

Q: Why do many firms object to paying for foreign currency option hedges

Why do many firms object to paying for foreign currency option hedges? Do firms pay for forward contract hedges? How do forwards and options differ if at all?

Q: Construct a delivery date profit or loss graph similar to Figure 20

Construct a delivery date profit or loss graph similar to Figure 20.2 for a long position in a forward contract with a delivery price of $65. Analyze the profit or loss for values of the underlying as...

Q: Repeat Study Problem 20–1, but this time draw the

Repeat Study Problem 20–1, but this time draw the profit or loss graph from the perspective of the individual who sold (is short on) the forward contract. Data from Problem 20–1: Construct a deliver...

Q: The Specialty Chemical Company operates a crude oil refinery located in New

The Specialty Chemical Company operates a crude oil refinery located in New Iberia, Louisiana. The company refines crude oil and sells the by-products to companies that make plastic bottles and jugs....

Q: Bernie’s Bears, Inc., manufactures plush toys in a facility in

Bernie’s Bears, Inc., manufactures plush toys in a facility in Cleveland, Ohio. Recently, the company designed a group of collectible resin figurines to go with the plush toy line. M...

Q: Larry Miller, the general manager of Basil Software, must decide

Larry Miller, the general manager of Basil Software, must decide when to release the new version of Basil’s spreadsheet package, Easy spread 2.0. Development of Easy spread 2.0 is co...

Q: A forward contract is a contract to purchase an asset at a

A forward contract is a contract to purchase an asset at a fixed price on a particular date in the future. Both parties are obligated to fulfill the contract. Explain how to construct a forward contra...

Q: 1. A forward rate can be used to do which of

1. A forward rate can be used to do which of the following? a. Mitigate currency exchange rate risk b. Reduce currency exchange rate risk c. Try to profit from expected currency exchange rate chang...

Q: A U.S. based multinational corporation (MNC) sold

A U.S. based multinational corporation (MNC) sold some equipment to a British firm today and will receive £1,000,000 from the British firm one month from today. Today’s spot rate is $1.12/£. The MNC i...

Q: When will the premium paid on a forward contract to hedge a

When will the premium paid on a forward contract to hedge a firm commitment to purchase inventory be reported in income under a cash flow hedge? Explain.

Q: You, the CPA, an audit senior at Grey & Co

You, the CPA, an audit senior at Grey & Co., Chartered Professional Accountants, are in charge of this year's audit of Plex-Fame Corporation (PFC). PFC is a rapidly expanding, diversified, and publicl...

Q: Interfast Corporation, a fastener manufacturer, has recently been expanding its

Interfast Corporation, a fastener manufacturer, has recently been expanding its sales through exports to foreign markets. Earlier this year, the company negotiated the sale of several thousand cases o...

Q: Manitoba Exporters Inc. (MEl) sells Inuit carvings to countries

Manitoba Exporters Inc. (MEl) sells Inuit carvings to countries throughout the world. On December 1, Year 5, MEl sold 10,000 carvings to a wholesaler in a foreign country at a total cost of 600,000 fo...

Q: On May 1, Year 1, JDH orders equipment from a

On May 1, Year 1, JDH orders equipment from a supplier in Germany for €100,000 with delivery scheduled for October 1, Year 1. Payment is due on December 31, Year 1. On May 2, Year 1 J...

Q: On June 1, Year 3, Forever Young Corp. (

On June 1, Year 3, Forever Young Corp. (FYC) ordered merchandise from a supplier in Turkey for Turkish lira (TL) 217,000. The goods were delivered on September 30, with terms requiring cash on deliver...

Q: Hull Manufacturing Corp. (HMC), a Canadian company, manufactures

Hull Manufacturing Corp. (HMC), a Canadian company, manufactures instruments used to measure the moisture content of barley and wheat. The company sells primarily to the domestic market, but in Year 3...

Q: Assume that all of the facts in Problem 1 remain unchanged except

Assume that all of the facts in Problem 1 remain unchanged except that MEl uses hedge accounting. Also, assume that the forward element and spot elements on the forward contract are accounted for sepa...

Q: Lamont Company is a Canadian company that produces electronic switches for the

Lamont Company is a Canadian company that produces electronic switches for the telecommunications industry. Lamont regularly imports component parts from Sousa Ltd., a supplier located in Mexico, and...

Q: On October 1, Year 6, Versatile Company contracted to sell

On October 1, Year 6, Versatile Company contracted to sell merchandise to a customer in Switzerland at a selling price of SF400,000. The contract called for the merchandise to be delivered to the cust...

Q: Hamilton Importing Corp. (HIC) imports goods from countries around

Hamilton Importing Corp. (HIC) imports goods from countries around the world for sale in Canada. On December 1, Year 3, HIC purchased 11,300 watches from a foreign wholesaler for DM613,000 when the sp...

Q: On August 1, Year 3, Carleton Ltd. ordered machinery

On August 1, Year 3, Carleton Ltd. ordered machinery from a supplier in Hong Kong for HK$500,000. The machinery was delivered on October 1, Year 3, with terms requiring payment in full by December 31,...

Q: EnDur Corp (EDC) is a Canadian company that exports computer

EnDur Corp (EDC) is a Canadian company that exports computer software. On February l, Year 2, EDC contracted to sell software to a customer in Denmark at a selling price of 600,000 Danish krona (DK) w...

Q: Soron Limited is a private company that uses derivatives to mitigate a

Soron Limited is a private company that uses derivatives to mitigate a variety of risks. The ethical accountant, Leon Price, has just been hired as the new controller and has recently met with the CEO...

Q: On January 1, 2017, Ginseng Inc. entered into a

On January 1, 2017, Ginseng Inc. entered into a forward contract to purchase U.S. $6,000 for $6,336 Canadian in 30 days. On January 15, the fair value of the contract was $40 (reflecting the present v...

Q: Refer to BE16-4. Assume the same facts except that

Refer to BE16-4. Assume the same facts except that the forward contract is a futures contract that trades on the Futures Exchange. Ginseng Inc. was required to deposit $30 with the stockbroker as a ma...

Q: Cauchy Inc. (CI) has just had a planning meeting

Cauchy Inc. (CI) has just had a planning meeting with its auditors. There were several concerns that had been raised during the meeting regarding the draft financial statements for the December 31, 20...

Q: On January 1, 2017, Roper Inc. agrees to buy

On January 1, 2017, Roper Inc. agrees to buy 3 kilos of gold at $40,000 per kilo from Golden Corp on April 1, 2017, but does not intend to take delivery of the gold. On the day that the contract was e...

Q: Refer to E16-2. Assume the same facts except that

Refer to E16-2. Assume the same facts except that the forward contract is a futures contract that trades on the Futures Exchange. On January 1, 2017, Roper is required to deposit $65 with the stockbro...

Q: The following situations occur independently. 1. A company knows

The following situations occur independently. 1. A company knows that it will require a large quantity of euros to pay for some imports in three months. The current exchange rate is satisfactory, and...

Q: Floral Gardens Incorporated is a nationwide chain of garden centres that operates

Floral Gardens Incorporated is a nationwide chain of garden centres that operates as a private company. In 2017, it issued three new financial instruments. All three of these instruments are new to yo...

Q: On January 1, 2020, Roper Inc. agrees to buy

On January 1, 2020, Roper Inc. agrees to buy 3 kg of gold at $40,000 per kilogram from Golden Corp on April 1, 2020, but does not intend to take delivery of the gold. On the day that the contract was...

Q: On January 1, 2020, Ginseng Inc. entered into a

On January 1, 2020, Ginseng Inc. entered into a forward contract to purchase U.S. $6,000 for $6,336 Canadian in 30 days. On January 15, the fair value of the contract was $40 (reflecting the present v...

Q: Refer to BE16.4. Assume the same facts except that

Refer to BE16.4. Assume the same facts except that the forward contract is a futures contract that trades on the Futures Exchange. Ginseng Inc. was required to deposit $30 with the stockbroker as a ma...

Q: Cauchy Inc. (CI) has just had a planning meeting

Cauchy Inc. (CI) has just had a planning meeting with its auditors. There were several concerns raised during the meeting regarding the draft financial statements for the December 31, 2020 year end. C...

Q: Refer to E16.2. Assume the same facts except that

Refer to E16.2. Assume the same facts except that the forward contract is a futures contract that trades on the Futures Exchange. On January 1, 2020, Roper is required to deposit $65 with the stockbro...

Q: Floral Gardens Incorporated is a nationwide chain of garden centres that operates

Floral Gardens Incorporated is a nationwide chain of garden centres that operates as a private company. In 2020, it issued three new financial instruments. All three of these instruments are new to yo...

Q: Maria VanHusen, CFA, suggests that using forward contracts on fixed

Maria VanHusen, CFA, suggests that using forward contracts on fixed-income securities can be used to protect the value of the Star Hospital Pension Plan’s bond portfolio against the possibility of ris...

Q: Silverado Inc. buys titanium from a supplier that requires a six

Silverado Inc. buys titanium from a supplier that requires a six-month firm commitment on allpurchases. On January 1, 20X1, Silverado signs a contract with the supplier to purchase 10,000 pounds of ti...

Q: Newton Grains plans to sell 100,000 bushels of corn from

Newton Grains plans to sell 100,000 bushels of corn from its current inventory in March 20X2. The company paid $1 million for the corn during the fall 20X1 harvest season. On October 1, 20X1, Newton w...

Q: Cleveland Company is a U.S. firm with a U

Cleveland Company is a U.S. firm with a U.S. dollar functional currency that manufactures copper-related products. It forecasts that it will sell 5,000 feet of copper tubing to one of its largest cust...

Q: On December 1, 2020, Venice Company (a U.

On December 1, 2020, Venice Company (a U.S.-based company) entered into a three-month for- ward contract to purchase 1,000,000 pesos on March 1, 2021. The following U.S. dollar per peso exchange rates...

Q: Assuming that Brandt entered into a forward contract to sell 10 million

Assuming that Brandt entered into a forward contract to sell 10 million South Korean won on December 1, 2020, as a fair value hedge of a foreign currency receivable, what is the net impact on its net...

Q: On March 1, Derby Corporation (a U.S.-

On March 1, Derby Corporation (a U.S.-based company) expects to order merchandise from a sup- plier in Norway in three months. On March 1, when the spot rate is $0.10 per Norwegian krone, Derby enters...

Q: What is the net impact on Munchkin’s net income for the quarter

What is the net impact on Munchkin’s net income for the quarter ended June 30, 2020, as a result of this forward contract hedge of a firm commitment? a. $–0– b. $2,400 increase in net income c. $4,000...

Q: What is the net impact on Munchkin’s net income for the quarter

What is the net impact on Munchkin’s net income for the quarter ended September 30, 2020, as a result of this forward contract hedge of a firm commitment and export sale? a. $–0– b. $115,000 increase...

Q: Use the same facts as in Problem 31 except that Icebreaker Company

Use the same facts as in Problem 31 except that Icebreaker Company purchases materials from a foreign supplier on December 1, 2020, with payment of 16,000 dinars to be made on March 1, 2021. The mater...

Q: On November 1, 2020, Cheng Company (a U.

On November 1, 2020, Cheng Company (a U.S.-based company) forecasts the purchase of goods from a foreign supplier for 100,000 yuan. Cheng expects to receive the goods on April 30, 2021, and make immed...

Q: On October 1, 2020, Mertag Company (a U.

On October 1, 2020, Mertag Company (a U.S.-based company) receives an order from a customer in Poland to deliver goods on January 31, 2021, for a price of 1,000,000 Polish zlotys (PLN). Mertag enters...

Q: 37. On August 1, Pure Joy Corporation (a U

37. On August 1, Pure Joy Corporation (a U.S.-based importer) placed an order to purchase merchandise from a foreign supplier at a price of 400,000 pounds. Pure Joy will receive and make payment for t...

Q: Pacifico Company, a U.S.-based importer of beer

Pacifico Company, a U.S.-based importer of beer and wine, purchased 1,000 cases of Oktoberfest- style beer from a German supplier for 50,000 euros. Relevant U.S. dollar exchange rates for the euro are...

Q: A U.S. exporter has a Thai baht account receivable

A U.S. exporter has a Thai baht account receivable resulting from an export sale on June 1 to a customer in Thailand. The exporter signed a forward contract on June 1 to sell Thai baht and designated...

Q: Monument Company (a U.S.-based company) ordered

Monument Company (a U.S.-based company) ordered a machine costing €100,000 from a foreign supplier on January 15, when the spot rate was $1.20 per €. A one-month forward contract was signed on that da...

Q: On February 1, 2020, when the spot rate was $

On February 1, 2020, when the spot rate was $1.00 per Swiss franc, Blue Bogey Company (BBC) fore- casted the purchase of component parts on May 1, 2020, at a price of 100,000 Swiss francs. On that dat...

Q: Maria VanHusen, CFA, suggests that forward contracts on fixed-

Maria VanHusen, CFA, suggests that forward contracts on fixed-income securities can be used to protect the value of the Star Hospital Pension Plan’s bond portfolio against the possibility of rising in...

Q: Hamilton Importing Corp. (HIC) imports goods from countries around

Hamilton Importing Corp. (HIC) imports goods from countries around the world for sale in Canada. On December 1, Year 3, HIC purchased 11,300 watches from a foreign wholesaler for DM613,000 when the sp...

Q: Sanctums, Inc., purchases wheat for use in its food manufacturing

Sanctums, Inc., purchases wheat for use in its food manufacturing process. Sanctums operates in a highly competitive industry and is rarely able to increase its sales price. ∙ On Jan...

Q: Cleveland Company is a U.S. firm with a U

Cleveland Company is a U.S. firm with a U.S. dollar functional currency that manufactures copper-related products. It forecasts that it will sell 5,000 feet of copper tubing to one of its largest cust...

Q: What are the advantages and disadvantages to a U.S.

What are the advantages and disadvantages to a U.S. corporation that uses currency options on euros rather than a forward contract on euros to hedge its exposure in euros? Explain why an MNC might use...

Q: Assume that a March futures contract on Mexican pesos was available in

Assume that a March futures contract on Mexican pesos was available in January for $0.09 per unit. Also assume that forward contracts were available for the same settlement date at a price of $0.092 p...

Q: Myrtle Beach Co. purchases imports that have a price of 400

Myrtle Beach Co. purchases imports that have a price of 400,000 Singapore dollars, and it has to pay for the imports in 90 days. It can purchase a 90-day forward contract on Singapore dollars at $0.50...

Q: How can a forward contract backfire?

How can a forward contract backfire?

Q: At the end of this month, you (the owner of

At the end of this month, you (the owner of a U.S. firm) are meeting with a Japanese firm to which you will try to sell supplies. If you receive an order from that firm, you will obtain a forward cont...

Q: Assume that interest rate parity exists. The one-year nominal

Assume that interest rate parity exists. The one-year nominal interest rate in the United States is 7 percent, while the one-year nominal interest rate in Australia is 11 percent. The spot rate of the...

Q: New York Co. has agreed to pay 10 million Australian dollars

New York Co. has agreed to pay 10 million Australian dollars (A$) in two years for equipment that it is importing from Australia. The spot rate of the Australian dollar is $0.60. The annualized U.S. i...

Q: Cornell Co. purchases computer chips denominated in euros on a monthly

Cornell Co. purchases computer chips denominated in euros on a monthly basis from a Dutch supplier. To hedge its exchange rate risk, this U.S. firm negotiates a three-month forward contract three mont...

Q: Assume that Calumet Co. will receive 10 million pesos in 15 

Assume that Calumet Co. will receive 10 million pesos in 15 months. It does not have a relationship with a bank at this time and, therefore, cannot obtain a forward contract to hedge its receivables a...

Q: Virginia Co. has subsidiaries in both Hong Kong and Thailand.

Virginia Co. has subsidiaries in both Hong Kong and Thailand. Assume that the Hong Kong dollar (HK$) is pegged at $0.13 per Hong Kong dollar and will remain pegged. The Thai baht fluctuates against th...

Q: Tampa Co. will build airplanes and export them to Mexico for

Tampa Co. will build airplanes and export them to Mexico for delivery in three years. The total payment to be received in three years for these exports is 900 million pesos. Today the peso’s spot rate...

Q: Red River Co. (a U.S. firm)

Red River Co. (a U.S. firm) purchases imports that have a price of 400,000 Singapore dollars; it has to pay for the imports in 90 days. The firm will use a 90-day forward contract to cover its payable...

Q: Assume interest rate parity exists. Today the one-year interest

Assume interest rate parity exists. Today the one-year interest rate in Canada is the same as the one-year interest rate in the United States. Utah Co. uses the forward rate to forecast the future spo...

Q: You own a U.S. exporting firm that will receive

You own a U.S. exporting firm that will receive 10 million Swiss francs in one year. Assume that interest parity exists. Assume zero transaction costs. Today the oneyear interest rate in the United St...

Q: Assume that interest rate parity exists. The annualized interest rate is

Assume that interest rate parity exists. The annualized interest rate is presently 5 percent in the United States for any term to maturity and is 13 percent in Mexico for any term to maturity. Dokar C...

Q: Assume that interest rate parity exists. Today the one-year

Assume that interest rate parity exists. Today the one-year interest rate in Japan is the same as the one-yearinterest rate in the United States. You use the international Fisher effect when forecasti...

Q: San Fran Co. imports products. It will pay 5 million

San Fran Co. imports products. It will pay 5 million Swiss francs for imports in one year. Mateo Co. will also pay 5 million Swiss francs for imports in one year. San Fran Co. and Mateo Co. will also...

Q: Assume that the country of Dreeland has a currency (called the

Assume that the country of Dreeland has a currency (called the dree) that tends to move in tandem with the Chilean peso and is expected to continue to move in tandem with the Chilean peso in the futur...

Q: Assume that Suffolk Co. negotiated a forward contract to purchase 200

Assume that Suffolk Co. negotiated a forward contract to purchase 200,000 British pounds in 90 days. The 90-day forward rate was $1.40 per British pound. The pounds to be purchased were to be used to...

Q: Lola Co. (a U.S. firm) expects

Lola Co. (a U.S. firm) expects to receive 10 million euros in one year. It does not plan to hedge this transaction with a forward contract or other hedging techniques. This transaction is its only int...

Q: Zistine Co. considers a one-year project in New Zealand

Zistine Co. considers a one-year project in New Zealand so that it can capitalize on its technology. Although the company is generally risk averse, it is attracted to the project because of a governme...

Q: Blustream, Inc., considers a project in which it will sell

Blustream, Inc., considers a project in which it will sell the use of its technology to firms in Mexico. It already has received orders from Mexican firms that will generate 3 million Mexican pesos (M...

Q: Recall that Blades, a U.S. manufacturer of roller

Recall that Blades, a U.S. manufacturer of roller blades, has chosen Thailand as its primary export target for Speedos, Blades’ primary product. Moreover, Blades’ p...

Q: Carlotto Co. (a U.S. firm) will

Carlotto Co. (a U.S. firm) will definitely receive 1 million British pounds in one year based on a business contract it has with the British government. Like most firms, Carlotto Co. is risk averse an...

Q: As the Sports Exports Company exports footballs to the United Kingdom,

As the Sports Exports Company exports footballs to the United Kingdom, it receives British pounds. The check (denominated in pounds) for last month’s exports just arrived. Jim Logan, the owner of the...

Q: Slidell Co. (a U.S. firm) considers

Slidell Co. (a U.S. firm) considers a foreign project in which it expects to receive 10 million euros at the end of one year. Although it realizes that its receivables are uncertain, it decides to hed...

Q: Lynn Construction enters into a firm purchase commitment for equipment to be

Lynn Construction enters into a firm purchase commitment for equipment to be delivered on June 30, Year 1, for a price of £10,000. It simultaneously signs a forward foreign exchange contract for £10,0...

Q: Kentucky Gold (KG) holds 10,000 gallons of whis

Kentucky Gold (KG) holds 10,000 gallons of whis key in inventory on October 31, Year 1, that costs $225 per gallon. KG contemplates selling the whiskey on March 31, Year 2, when it completes the aging...

Q: You are the manager of a stock portfolio for a financial institution

You are the manager of a stock portfolio for a financial institution, and approximately 20 percent of your stock portfolio is in British stocks. You expect the British stock market to perform well ove...

Q: On December 1, 20X1, Micro World Inc. entered into

On December 1, 20X1, Micro World Inc. entered into a 120-day forward contract to purchase 100,000 Australian dollars (A$). Micro World’s fiscal year ends on December 31. The direct e...

Q: Cuddly Critters, Inc., manufactures plush toys in a facility in

Cuddly Critters, Inc., manufactures plush toys in a facility in Queensland, Brisbane. Recently, the company designed a group of collectible resin figurines to go with the plush toy line. Management is...

Q: On March 13, 2020, you convert 500,000 U

On March 13, 2020, you convert 500,000 U.S. dollars to Japanese yen in the spot foreign exchange market and purchase a six-month forward contract to convert yen into dollars. How much will you recei...

Q: ZHU share price is $50. The risk-free rate

ZHU share price is $50. The risk-free rate is 2 percent. Suppose you want to enter a forward contract for delivery of ZHU shares in one year. Assuming that ZHU won’t pay any dividend in the coming yea...