34 S On June 1, Maxwell Corporation (a U.S.-based company) sold goods to a foreign customer at a price of 1,340,000 pesos and will receive payment in three months on September 1. On June 1, Maxwell acquired an option to sell 1,340,000 pesos in three months at a strike price of $0.098. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Relevant exchange rates and option premia for the peso are as follows: Date June 1 June 30 September 1 Spot Rate $ 0.098 0.097 0.096 Maxwell must close its books and prepare its second-quarter financial statements on June 30. a-1. Assuming that Maxwell designates the foreign currency option as a cash flow hedge of a foreign currency receivable, prepare journal entries for the export sale and related hedge in U.S. dollars. Put Option Premium for September 1 (strike price $0.098) $ 0.0061 0.0040 N/A a-2. What is the impact on net income over the two accounting periods? b-1. Assuming that Maxwell designates the foreign currency option as a fair value hedge of a foreign currency receivable, prepare journal entries for the export sale and related hedge in U.S. dollars. b-2. What is the impact on net income over the two accounting periods? Req A1 Complete this question by entering your answers in the tabs below. Req A2 Req B1 Req B2

34 S On June 1, Maxwell Corporation (a U.S.-based company) sold goods to a foreign customer at a price of 1,340,000 pesos and will receive payment in three months on September 1. On June 1, Maxwell acquired an option to sell 1,340,000 pesos in three months at a strike price of $0.098. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Relevant exchange rates and option premia for the peso are as follows: Date June 1 June 30 September 1 Spot Rate $ 0.098 0.097 0.096 Maxwell must close its books and prepare its second-quarter financial statements on June 30. a-1. Assuming that Maxwell designates the foreign currency option as a cash flow hedge of a foreign currency receivable, prepare journal entries for the export sale and related hedge in U.S. dollars. Put Option Premium for September 1 (strike price $0.098) $ 0.0061 0.0040 N/A a-2. What is the impact on net income over the two accounting periods? b-1. Assuming that Maxwell designates the foreign currency option as a fair value hedge of a foreign currency receivable, prepare journal entries for the export sale and related hedge in U.S. dollars. b-2. What is the impact on net income over the two accounting periods? Req A1 Complete this question by entering your answers in the tabs below. Req A2 Req B1 Req B2

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter8: Relationships Among Inflation, Interest Rates, And Exchange Rates

Section: Chapter Questions

Problem 33QA

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On June 1, Maxwell Corporation (a U.S.-based company) sold goods to a foreign customer at a price of 1,080,000 pesos and will receive payment in three months on September 1. On June 1, Maxwell acquired an option to sell 1,080,000 pesos in three months at a strike price of $0.106. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Relevant exchange rates and option premia for the peso are as follows: Date Spot Rate Put Option Premiumfor September 1(strike price $0.106) June 1 $ 0.106 $ 0.0069 June 30 0.105 0.0044 September 1 0.104 N/A Maxwell must close its books and prepare its second-quarter financial statements on June 30. a-1. Assuming that Maxwell designates the foreign currency option as a cash flow hedge of a foreign currency receivable, prepare journal entries for the export sale and related hedge in U.S. dollars.…
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On June 1, Wellmax Co. (a U.S.-based company) sold goods to a foreign customer for 1,040,000 pesos. The customer will pay on September 1. On June 1, Wellmax bought an option (strike price = $0.066) to sell 1,040,000 pesos on September 1. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. The foreign currency option is designated a fair value hedge. Relevant exchange rates and option premia follow. Date June 1 June 30 September 1 What is the fair value of the option contract on June 1? Spot Rate $0.066 0.065 0.064 Put Option Premium for September 1 (strike price $0.066) $0.0029 0.0024 N/A
On September 1, Westbrook Corporation purchased goods from a foreign supplier at a price of 1,000,000 francs and will make payment in three months on December 1. On September 1, Westbrook acquired an option to purchase 1,000,000 francs in three months at a strike price of $0.852. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Relevant exchange rates and option premia for the franc are as follows: Date September 1 September 30 December 1 Spot Rate $ 0.852 0.858 0.870 Call Option Premium for December 1 (strike price $0.852) $0.0020 0.0075 N/A Westbrook must close its books and prepare its third-quarter financial statements on September 30. The goods purchased on September 1 are sold in December. a-1. Assuming that Westbrook designates the foreign currency option as a cash flow hedge of a foreign currency payable, prepare journal entries for the import purchase and…
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Exercise 1 (LO 3, 6) Hedging a foreign currency liability with an option desig- nated as a fair value hedge. Williams Corporation imports, from a number of German manufacturers, large machining equipment used in the tooling industry. On June 1, the com- pany received delivery of a piece of machinery with a cost of 450,000 euros when the spot rate was 1 euro equals $1.370. Williams had already paid 50,000 euros, when the spot rate was 1 euro equals $1.350, to the German company at the time of placing the order, and the balance of the invoice was due in 60 days after delivery. On June 15, the company became concerned that the dollar would weaken relative to the euro and proceeded to purchase an option to buy euros on July 31 at a strike price of 1 euro equals $1.375. The hedge was designated as a fair value hedge. At the time of purchase, the out-of-the-money option had a value of $1,400 and a value of $2,600 at June 30. Euro spot rates are as follows: 1 euro = $1.373 1.381 June 15 June…