On October 5th, Excelsior Corporation, a U.S. company, placed an order for 20,000 units from Shanghai, Inc. in China. The cost of the order was 2,000,000 yuan when the spot rate was $.015. To minimize the exchange rate risk, Excelsior entered into a forward contract to purchase 2,000,000 yuan at a rate of .018. This forward contract meets the criteria to be designated as a fair value hedge. On November 15 ^ (th) Excelsior received the 20,000 units. At that time, the spot rate was $.020. On December 10 th Excelsior paid Shanghai 2,000,000 yuan, when the spot rate was $.017, What amount will Excelsior recognize as a net gain/ loss with respect to this transaction ?
On October 5th, Excelsior Corporation, a U.S. company, placed an order for 20,000 units from Shanghai, Inc. in China. The cost of the order was 2,000,000 yuan when the spot rate was $.015. To minimize the exchange rate risk, Excelsior entered into a forward contract to purchase 2,000,000 yuan at a rate of .018. This forward contract meets the criteria to be designated as a fair value hedge. On November 15 ^ (th) Excelsior received the 20,000 units. At that time, the spot rate was $.020. On December 10 th Excelsior paid Shanghai 2,000,000 yuan, when the spot rate was $.017, What amount will Excelsior recognize as a net gain/ loss with respect to this transaction ?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:On October 5th, Excelsior Corporation, a U.S. company, placed an order for 20,000 units from
Shanghai, Inc. in China. The cost of the order was 2,000,000 yuan when the spot rate was
$.015. To minimize the exchange rate risk, Excelsior entered into a forward contract to purchase
2,000,000 yuan at a rate of .018. This forward contract meets the criteria to be designated as a
fair value hedge. On November 15 ^ (th) Excelsior received the 20,000 units. At that time, the
spot rate was $.020. On December 10 th Excelsior paid Shanghai 2,000,000 yuan, when the
spot rate was $.017, What amount will Excelsior recognize as a net gain/ loss with respect to this
transaction ?
Select one:
a. $6,000 gain
b. There is no gain or loss because the forward contract serves as a hedge against this
transaction.
c. $4,000 gain
d. $6,000 loss
e. $4,000 loss
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Step 1: Calculate Initial Transaction (October 5th)
VIEWStep 2: Calculate Forward Contract (October 5th)
VIEWStep 3: Net Gain/Loss at the Time of the Forward Contract (October 5th)
VIEWStep 4: Receipt of Goods (November 15th)
VIEWStep 5: Payment to Shanghai (December 10th)
VIEWStep 6: Net Gain/Loss at the Time of Payment (December 10th)
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