Please check the image for full details and thanks for the help ! Amazing Corpor
ID: 2485958 • Letter: P
Question
Please check the image for full details and thanks for the help ! Amazing Corporation, a U.S. enterprise, sold product to a customer in Wales on October 1, 20x for £100,000 with payment required on April 1, 20xl. Relevant exchange rates are: October 1, 20x1 December 31, 20x1 April 1, 20x2 Spot rate $1.87 $1.85 $1.90 $1.85 $1.84 The discount factor .95 corresponding to the company's incremental borrowing rate for 6 monthsis 6. Assuming that Amazing Corporation does not hedge this transaction, what is the amount of exchange gain or loss that it should show on its December 31, 20xl income statement? A) Loss $1,000 Loss $2,000 C) Gain $1,000 D) Gain $1,900 Assume that Amazing Corporation enters a forward contract on October 1, 20x1 to sell £100,000 six months hence, on April 1, 20x2. How should Amazing Corporation report the forward contract on its December 31, 20x1 financial statements? A) Asset $1,950 B) Liability $1,950 C) Asset $1,000 7. -D) Asset $950 What term is used to describe the circumstances under which Amazing Corporation is entering the forward contract? A) hedge of an unrecognized foreign currency firm commitment B) hedge of a recognized foreign-currency-denominated asset C) hedge of a forecast foreign-currency-denominated transaction D) hedge of net investment in foreign operations 8.
Explanation / Answer
6. Since exporter has not hedged the transaction, therefore his loss/gain would be the difference between spot rate as on oct 1,20X1 and spot rate as on Dec 31,20x1 i.e date of recording income..
spot rate on oct1,20x1 is $ 1.87
receipt = 100000*1.87 = $ 187000
spot rate on dec 31,20X1 is $1.85
receipt = 100000*1.85 = $185000
loss = 187000-185000= $2000
so option B is correct
7. By taking forward cover receivables will be booked on forward rate i.e $1.85
forward rate as on 31 dec,20x1 is $1.84 therefore there is gain of $0.01 (1.85-1.84)
gain will be recorded taking PV that by applying discountung factor
therefore gain is 100000*0.01*0.95 = $950
So, option D is correct i.e Asset $ 950
8. A Forward Contract is a way for a buyer or a seller to lock in a purchasing or selling price for an asset, with the transaction set to occur in the future. By locking into a forward contract to sell a currency, the seller sets a future exchange rate with no upfront cost. Both way there is recognized receibales and payables so it is a way of hedging a recognized foreign currency asset & liabilty. In the view of above explanation
option B is correct.