On November 1, 2020, Ocean Grove, Inc., a U.S. company, purchased from Monterrey Corporation, a Mexican company, some machinery that cost 1,000,000 pesos (the machinery was delivered on November 1, so this is the "existing payable" scenario). The invoice was payable in pesos on February 1, 2021. To hedge against any potential change in the exchange rate, Ocean Grove entered into a forward contract on November 1, 2020 with Bradley Beach Trader. a US brokerage and investment firm. The contract specified that Ocean Grove would buy 1,000,000 pesos from Bradley Beach for settlement on February 1, 2021. Assume the company uses the gross method. Relevant exchange rates are below: 11/1/20 12/31/20 2/1/21 Spot $0.042 $0.043 $0.040 rate Forward rate for 2/1/21 $0.045 $0.047 When Ocean Grove records the forward contract with Brady Beach Trader on November 1, which side will be denominated in pesos, and for how much?

On November 1, 2020, Ocean Grove, Inc., a U.S. company, purchased from Monterrey Corporation, a Mexican company, some machinery that cost 1,000,000 pesos (the machinery was delivered on November 1, so this is the "existing payable" scenario). The invoice was payable in pesos on February 1, 2021. To hedge against any potential change in the exchange rate, Ocean Grove entered into a forward contract on November 1, 2020 with Bradley Beach Trader. a US brokerage and investment firm. The contract specified that Ocean Grove would buy 1,000,000 pesos from Bradley Beach for settlement on February 1, 2021. Assume the company uses the gross method. Relevant exchange rates are below: 11/1/20 12/31/20 2/1/21 Spot $0.042 $0.043 $0.040 rate Forward rate for 2/1/21 $0.045 $0.047 When Ocean Grove records the forward contract with Brady Beach Trader on November 1, which side will be denominated in pesos, and for how much?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question

On November 1, 2020, Ocean Grove, Inc., a U.S. company, purchased from Monterrey Corporation, a Mexican company, some machinery that cost 1,000,000 pesos (the
machinery was delivered on November 1, so this is the "existing payable" scenario). The invoice was payable in pesos on February 1, 2021. To hedge against any potential changes
in the exchange rate, Ocean Grove entered into a forward contract on November 1, 2020 with Bradley Beach Trader. a US brokerage and investment firm. The contract specified
that Ocean Grove would buy 1,000,000 pesos from Bradley Beach for settlement on February 1, 2021. Assume the company uses the gross method. Relevant exchange rates
are below:
11/1/20 12/31/20 2/1/21
Spot
$0.042
$0.043
$0.040
rate
Forward rate for
2/1/21
$0.045
$0.047
When Ocean Grove records the forward contract with Brady Beach Trader on November 1, which side will be denominated in pesOs, and for how much?
Contract Payable for $42,000
Contract Receivable for $42,000
Contract Receivable for $45,000
Contract Payable for $45,000
0000

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