Forward Rate for 30 Days Forward Rate for 60 Days from November 30 Spot Rate from November 1 1 FC= $1.120 1 FC = $1.130 1 FC = $1.150 1 FC= $1.140 November 1 1 FC = $1.132 %3D November 15 November 30 December 31. 1 FC = $1.146 1 FC = $1.138 %3D %3D %3D
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 exposure to exchange rate risk. Several such transactions are as follows:
Transaction A: On November 30, the company purchased inventory from a vendor in the amount of 100,000 FC with payment due in 60 days. Also on November 30, the company purchased a forward contract to buy FC in 60 days. Assume a fair value hedge.
Transaction B: On November 1, the company committed to provide services to a foreign customer in the amount of 100,000 FC. The services will be provided in 30 days. On November 1, the company also purchased a forward contract to sell 100,000 FC in 30 days. Changes in the value of the commitment are based on changes in forward rates.
Transaction C: On November 1, the company
Transaction D: On November 30, the company purchased an option to sell 100,000 FC in 60 days to hedge a forecasted sale to a customer in 60 days. The option sold for a premium of $1,200 and had a strike price of $1.155. The value of the option on December 31 was $2,000. Relevant spot and forward rates are as shown in the attachment.
Assuming that the company’s year-end is December 31, for each of the above transactions determine the current-year effect on earnings. All necessary discounting should be determined by using a 6% discount rate. For transactions C and D, the time value of the hedging instrument is excluded from hedge effectiveness and is to be separately accounted for.
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