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3 DERIVATIVES AND HEDGING ACTIVITIES Final

The document discusses several examples of companies entering into forward contracts and options to hedge foreign currency risks from planned or anticipated transactions. For each example, the relevant exchange rates are provided and the company is asked to prepare the necessary journal entries to account for the derivatives contracts over time until settlement or expiration.

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Cha Chie
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130 views2 pages

3 DERIVATIVES AND HEDGING ACTIVITIES Final

The document discusses several examples of companies entering into forward contracts and options to hedge foreign currency risks from planned or anticipated transactions. For each example, the relevant exchange rates are provided and the company is asked to prepare the necessary journal entries to account for the derivatives contracts over time until settlement or expiration.

Uploaded by

Cha Chie
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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DERIVATIVES AND HEDGING ACTIVITIES

1. On March 1, 20x9, MAE COMPANY, a Philippine firm, purchased inventory for US$10,000,
payable on February 1, 20x10. On March 1, 20x9, the Philippine firm entered into a 330-day
forward contract to buy US$10,000 on February 1, 20x10 for P46.00. The firm’s fiscal year-
end is December 31.
The spot rates and forward rates for US $ on March 1, 20x9 at various dates are as follows:
3/1/20x9 12/31/20x9 2/1/20x10
Spot rate 45.00 45.60 45.10
30-day forward rate 45.90 46.50 46.80
330-day forward rate 46.00 46.90 47.00
Determine the journal entries for years 20x9 and 20x10.

2. On September 1, 20x0, Easy Company purchased FC15,000 worth of inventory items on


account due on March 1, 20x1. The Company entered into a forward contract to hedge this
transaction on October 1, 20x0. On November 1, 20x0, the company reported sales on account
of FC25,000 due on January 31, 20x1. The company hedged this transaction on the same date.
The related spot and forward rates are as follows:

Spot rates Forward


Rates
Buying Selling
September 1, 20x0 15 14 16
October 1, 20x0 13 15 17
November 1, 20x0 15 12 17
December 31, 20x0 16 14 18
January 31, 20x1 17 17 19
March 1, 20x1 16 14 20
Determine the net effect of the forward contracts on Easy Company’s net income for 20x0.
Determine the net effect of the forward contracts on Easy Company’s net income for 20x1.

3. Assume on November 2, 20x7, Maybelline Cosmetics, Inc. ordered merchandise from a


foreign company for delivery to Maybelline on January 31, 20x8 at a price of 1,000,000 FC.
Also on November 2, 20x7 Maybelline entered into a forward contract to purchase 1,000,000
FC for delivery on January 31, 20x8. Exchange rates for the foreign currency are:
11/02/20x7 12/31/20x7 01/31/20x8
Spot rate P.75 P.76 P.79
30-day forward .76 .80 .79
90-day forward .78 .79 .80
Required:
Prepare all journal entries for the information

4. Bateman Industries, a Filipino corporation, anticipates a contract based on the December 2,


20x7 discussions to sell equipment to Ramsay Ltd. of Hong Kong for 500,000 Hong Kong
dollars. The equipment will likely be delivered and the amount collected on March 1, 20x8.
In order to hedge its anticipated commitment, Bateman entered into a forward contract on
December 2 to sell 500,000 Hong Kong dollars for delivery on March 1.

Exchange rates for Hong Kong dollars on selected dates are as follows:
12/2/20x7 12/31/20x7 3/1/20x8
Spot rate P6.7000 P6.7100 P6.7200
60-day futures 6.6800 6.6900 6.7000
90-day futures 6.6600

Required:
Prepare the necessary journal entries on Bateman’s books to account for:
1. The forward contract on December 2, 20x7.
2. Year-end adjustments relating to the forward contract on December 31, 20x7.
3. The delivery of the equipment and settlement of all accounts with Ramsay Ltd. and
the exchange broker on March 1, 20x8.

5. TAN Corp., a Pinoy import-export firm, enters into a forward contract on October 2, 20x7 to
speculate in Swiss francs. The contract requires Martin to deliver 1,000,000 Swiss francs to
the exchange broker on March 31, 20x8.

Quoted exchange rates for Swiss francs are as follows:


10/2/20x7 12/31/20x7 3/31/20x8
Spot rate P34.590 P34.500 P34.550
30-day forward P34.580 P34.450 P34.500
90-day forward P34.560 P34.410 P34.460
180-day forward P34.530 P34.360 P34.400

Required: Prepare the journal entries on Tan’s books to account for the speculation
throughout the life of the contract.

6. On December 1, 20x8, SONY Company paid P6,000 to purchase a 90-day put option for FC
400,000. The option’s purpose is to hedge an exposed accounts receivable of FC 400,000
from a sale of merchandise. The merchandise is to be shipped on December 1, 20x8, payment
for which is due on March 1, 20x9.

Relevant rates and market values at different dates are as follows:


12/01/20x8 12/31/20x8 03/01/20x9
Spot rate (market price) P1.20 P1.12 P1.13
Strike price (exercise price) 1.20 1.20 1.20
Fair Value of Put Option P6,000 P36,000 P28,000

Required:
Prepare journal entries for the above information.

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