ADVANCED FIN. ACCT. LL W/ACCESS>CUSTOM<
12th Edition
ISBN: 9781265074623
Author: Christensen
Publisher: MCG CUSTOM
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Question
Chapter 11, Problem 11.5C
To determine
Introduction:
Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate, the difference between the spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.
The accounting for foreign currency forward contract, in a memo.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
9
Investment decisions Carpet Baggers Inc. is proposing to construct a new bagging plant in a country in Europe. The two prime candidates are Germany and Switzerland. The forecasted cash flows from the proposed plants are attached
The spot exchange rate for euros is $1.3/€, while the rate for Swiss francs is CHF 1.5/$. The interest rate is 5% in the United States, 4% in Switzerland, and 6% in the euro countries. The financial manager has suggested that, if the cash flows were stated in dollars, a return in excess of 10% would be acceptable. Should the company go ahead with either project? If it must choose between them, which should it take?
Suppose that Retrojo Inc. is a U.S. based MNC that will need to purchase F$1.10 million (Fijian dollars, F$) worth of imports from Fiji in 90 days.
Currently, the spot rate for the Fijian dollar is $0.53 per F$.
Suppose that Retrojo negotiates a forward contract with a bank, which commits it to purchasing Fijian dollars at F$1,100,000.00 at $0.53 per Fijian
dollar in 90 days. Thus, Retrojo knows with certainty that it will need F$1,100,000.00 × $0.53 per Fijian dollars = $583,000.00 for this exchange.
Assume the Fijian dollar depreciates over this time period to $0.42 per Fijian dollar. If this were the case the, outside of the contract with the bank,
only $
(U.S. dollars) would be needed to exchange for the required F$1,100,000.00.
Chapter 11 Solutions
ADVANCED FIN. ACCT. LL W/ACCESS>CUSTOM<
Ch. 11 - Prob. 11.1QCh. 11 - Prob. 11.2QCh. 11 - The U.S. dollar strengthened against the European...Ch. 11 - Prob. 11.4QCh. 11 - Prob. 11.5QCh. 11 - How are assets and liabilities denominated in a...Ch. 11 - Prob. 11.7QCh. 11 - Prob. 11.8QCh. 11 - Prob. 11.9QCh. 11 - Distinguish between an exposed net asset position...
Ch. 11 - Prob. 11.11QCh. 11 - Prob. 11.12QCh. 11 - Effects of Changing Exchange Rates Analysis Since...Ch. 11 - Prob. 11.2CCh. 11 - Prob. 11.5CCh. 11 - Prob. 11.1ECh. 11 - Prob. 11.2ECh. 11 - Basic Understanding of Foreign Exposure The...Ch. 11 - Prob. 11.5ECh. 11 - Prob. 11.6ECh. 11 - Prob. 11.7ECh. 11 - Adjusting Entries for Foreign Currency Balances...Ch. 11 - Prob. 11.9ECh. 11 - Prob. 11.10ECh. 11 - Prob. 11.11.1ECh. 11 - Prob. 11.11.2ECh. 11 - Prob. 11.11.3ECh. 11 - Prob. 11.11.4ECh. 11 - Prob. 11.11.5ECh. 11 - Prob. 11.11.6ECh. 11 - Prob. 11.11.7ECh. 11 - Prob. 11.12ECh. 11 - Prob. 11.13ECh. 11 - Prob. 11.14.1ECh. 11 - Foreign Currency Transactions [AICPA Adapted]...Ch. 11 - Prob. 11.14.3ECh. 11 - Prob. 11.14.4ECh. 11 - Prob. 11.14.5ECh. 11 - Foreign Currency Transactions [AICPA Adapted]...Ch. 11 - Prob. 11.14.7ECh. 11 - Prob. 11.15ECh. 11 - Prob. 11.16AECh. 11 - Prob. 11.17ECh. 11 - Prob. 11.18ECh. 11 - Prob. 11.19.1ECh. 11 - Prob. 11.19.2ECh. 11 - Prob. 11.19.3ECh. 11 - Prob. 11.19.4ECh. 11 - Prob. 11.19.5ECh. 11 - Prob. 11.20.1PCh. 11 - Prob. 11.20.2PCh. 11 - Prob. 11.20.3PCh. 11 - Prob. 11.20.4PCh. 11 - Prob. 11.20.5PCh. 11 - Foreign Sales Tex Hardware sells many of its...Ch. 11 - Prob. 11.22PCh. 11 - Prob. 11.23.1PCh. 11 - Prob. 11.23.2PCh. 11 - Prob. 11.24PCh. 11 - Prob. 11.25PCh. 11 - Prob. 11.26PCh. 11 - Prob. 11.27.1PCh. 11 - Prob. 11.27.2PCh. 11 - Prob. 11.27.3PCh. 11 - Prob. 11.28APCh. 11 - Prob. 11.29.1BPCh. 11 - Prob. 11.29.2BPCh. 11 - Prob. 11.29.3BPCh. 11 - Prob. 11.29.4BPCh. 11 - Prob. 11.29.5BPCh. 11 - Prob. 11.29.6BPCh. 11 - Prob. 11.30BPCh. 11 - Prob. 11.31BPCh. 11 - Matching Key Terms Match the items in the lefthand...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- Ganado Corporation recently received a payment for one of the consignments it exported to Europe, It has 2,000 Euros (€ or EUR) with it. Wanting to exchange all of these for Russian rubles(R or RUB) since it will be importing a new machine from a merchant in Russia, it obtains the following quotes: Spot rate USD=1.00 EUR (or $/€) Spot rate RUB=1.00 USD (or R/S) a. What is the Russian ruble to euro crossrate? b. How many Russian rubles will you obtain for your Euros? 1.1280 62.40arrow_forwardSuppose that Retrojo Inc. is a U.S. based MNC that will need to purchase F$2.00 million (Fijian dollars, F$) worth of imports from Fiji in 90 days. Currently, the spot rate for the Fijian dollar is $0.80 per F$. Suppose that Retrojo negotiates a forward contract with a bank, which commits it to purchasing Fijian dollars at F $2,000,000.00 at $0.80 per Fijian dollar in 90 days. Thus, Retrojo knows with certainty that it will need F$2,000,000.00×$0.80 per Fijian dollars =$1,600,000.00 for this exchange. Assume the Fijian dollar depreciates over this time period to $0.67 per Fijian dollar. If this were the case the outside of the contract only (U.S. dollars) would be needed to exchange for the required F$2,000,000.00.arrow_forwardSuppose that a US-based company is buying Chinese goods. Current exchange rate for Chinese Yuan is 0.15 USD. The price of goods is ¥13,000 per unit. The company is buying 800 units per year with a fixed contract for the next two years. Suppose that Chinese Yuan appreciate to 0.2 USD in the next year. The US importer will respond to this by lowering the demand to 600 units in the third year. What cash flow will be reflected on the balance of payments at the end of the third year? Your Answer:arrow_forward
- Suppose that Warner Co is a U.S.-based MNC with a major subsidiary in France. This French subsidiary deals in euros, and is expected to earn 35 million euros next year. However, as these euros will stay with the subsidiary in France, Warner is concerned about translation exposure. To hedge against this translation exposure, Warner decides to sell 35 million euros forward. Warner can then purchase euros at the prevailing spot rate in one year to fulfill the forward contract. Suppose that the forward rate for euros is $1.20 and the spot rate for euros currently is also $1.20. If the euro depreciates to a weighted average exchange rate of $1.10 in one year, than the translated earnings for the French subsidiary will be $ $ million. However, if the value of the euro remains at $1.20, the translated earnings of the French subsidiary would be million. This means that a depreciation of the euro would cause the translated earnings of the French subsidiary to decreasarrow_forwardA Brazillian coffee exporter has found a market for his coffee to the tune of 1,800,000 Euros. At the time of sale, the spot rate between Kenya shillings and Euros was ksh 126/Euro. The payment was expected after one month when the deal would be concluded. The interest rates in Kenya were 9% while in Germany they were 7%.per annum Required: 1. Advise the exporter after ascertaining the domestic currency appreciation or depreciation. 2. Suggest plausible non-financial hedging techniques to shield the exporterarrow_forwardCase-in-brief - Argentina Currency Devaluation Your company is currently operating in Argentina. Management is concerned to what extent the Argentine peso will be devalued. It wants to examine two scenarios: one where the currency drops 15% and one where it drops 26%. Currently, the exchange rate is 94 pesos (ARS$ 94) to 1 US dollar (US$1). Contribution after marketing in Argentina was 21% of sales (see Exhibit). Your goal is to maintain this percentage. Exhibit: Argentina Contribution after Marketing (ARS$ Argentine Pesos) Unit Sales Manufacturer Sales Costs Gross Margin Total Marketing Cont bution after Marketing Units 46 ARS 325.9 100% 183.3 142.6 73.3 69.3 % 56% 44% 22% 21% QUESTION 1 How would the devaluation of the Argentine peso (ARSS) affect your contribution in the home currency (US$)? Current contribution in USD (home currency): USD $ 0.000 Contribution in USD after 15% drop: USD $ 0.000 Contribution in USD after 26% drop: USD $ 0.000 Millions Million Million Go to last…arrow_forward
- Subject:- financearrow_forwardLakonishok equipment has an investment opportunity in Europe. The project cost 14,750,000 in europe currency and is expected to produce cash flows of euro 3,350,000 in year 1, euro 4,350,000 in year 2, and euro 4,750,000 in year 3. The current spot exchange rate is $ .83 in euros and the current risk free rate in the united states is 3 percent, compared to that in euroland of 2.2 percent. The appropriate discount rate for the project is estimated to be 10 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated 9,250,000 in euros. What is the NPV of the project in U.S dollars? Do not round intermediate calculations and enter your answers in dollars , not in million of dollars , rounded to 2 decimal places e.g. 1,234,567,.89.arrow_forward78arrow_forward
- Suppose your company imports computer motherboards from Singapore. The exchange rate is currently 1.3356 S$/US$. You have just placed an order for 30,000 motherboards at a cost to you of 218.50 Singapore dollars each. You will pay for the shipment when it arrives in 90 days. You can sell the motherboards for $175 each. a. Calculate your profit if the exchange rate stays the same over the next 90 days. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b. Calculate your profit if the exchange rate rises by 10 percent over the next 90 days. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. c. Calculate your profit if the exchange rate falls by 10 percent over the next 90 days. Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. d. What is the break-even exchange rate? Note: Do not round…arrow_forwardSuppose that warner coarrow_forwardSuppose that Kittle Co. is a U.S. based MNC that is considering setting up a subsidiary in Singapore. Kittle would like this subsidiary to produce and sell guitars locally in Singapore, and needs assistance with capital budgeting. The duration of this project is four years, with a salvage value of $12,000,000. This salvage value would be paid by the government in Singapore to Kittle in exchange for ownership of the subsidiary. The expected exchange rate of the Singapore dollar of $0.50 over the life of the project. Kittle managers are worried about the uncertainty of the value of the Singapore dollar. While they expect that the exchange rate will be $0.50, they recognize that this value may fluctuate. Thus, they decide to S$3,000,000 in cash flows per year, while any additional cash flows beyond this threshold would not be hedged. The forward rate that Kittle will use to hedge the S$3,000,000 is $0.48. The following table shows a key subsection of Kittle's capital budgeting analysis…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Foreign Exchange Risks; Author: Kaplan UK;https://www.youtube.com/watch?v=ne1dYl3WifM;License: Standard Youtube License