EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 23, Problem 6CP
A
Summary Introduction
To explain: The need of financial futures- based strategy and how this strategy allows to implement allocation of investment.
Introduction: Reallocation of the money means divided the investment and use to some other investments. Future based strategy is used to reallocate the money from one investment to other investment without any loss of money.
B
Summary Introduction
To calculate: Number of bond future contract and stock-index futures contracts needed to implement Delsing’s asset allocation strategy.
Introduction: Future contract is an agreement for selling and purchasing of the financial commodities and securities in predetermined date at fixed price.
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An Omani importer will receive commodities from USA and he has to pay an amount of USD 250,000 next month. Which of the below markets is well
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Jordan Corp is a US manu8facturer of auto pats with branchoperatiopns in France. on December 31, 2018 wishesto use a foreign currency option to hedge a 10,000,000 euro denominated accounts receivable that is due in two years. Jordan plans to use fair value hedge accounting. Over the subsequent 4 quarters the following are the changes in fair value of the receivable and the forreign currency option hedge.
1) Quarter ended March 31, 2019:
Euro receivable increases by $400,000
Option hedge declines by $350,000
2) Quater ended June 30, 2019:
Euro receivable decreases by $500,000
Option hedge increases by $400,000
3) Quarter ended Sept 30, 2019:
Euro receivable decreases by $800,000
Option hedge increases by $700,000
4) Quarter ended Dec. 31, 2019:
Euro receivable increases by $200,000
Option hedge declines by $100,000
Identify by codification reference, e.g. xxx-xx-xx-xx, and attach and highlight the appropriate section(s) of FASB codification that describe the alternate criteria that can…
Chapter 23 Solutions
EBK INVESTMENTS
Ch. 23 - Prob. 1PSCh. 23 - Prob. 2PSCh. 23 - Prob. 3PSCh. 23 - Prob. 4PSCh. 23 - Prob. 5PSCh. 23 - Prob. 6PSCh. 23 - Prob. 7PSCh. 23 - Prob. 8PSCh. 23 - Prob. 9PSCh. 23 - Prob. 10PS
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- Jordan Corp is a US manu8facturer of auto pats with branchoperatiopns in France. on December 31, 2018 wishesto use a foreign currency option to hedge a 10,000,000 euro denominated accounts receivable that is due in two years. Jordan plans to use fair value hedge accounting. Over the subsequent 4 quarters the following are the changes in fair value of the receivable and the forreign currency option hedge. 1) Quarter ended March 31, 2019: Euro receivable increases by $400,000 Option hedge declines by $350,000 2) Quater ended June 30, 2019: Euro receivable decreases by $500,000 Option hedge increases by $400,000 3) Quarter ended Sept 30, 2019: Euro receivable decreases by $800,000 Option hedge increases by $700,000 4) Quarter ended Dec. 31, 2019: Euro receivable increases by $200,000 Option hedge declines by $100,000 Questions: a) Structure the appropriate fair value hedge using an FX option. Answer must state whether Jordan is purchasing or selling an option, what is the expiration date…arrow_forwardMichelle Industries issued a Swiss franc–denominated 5-year discount note for SFr200 million. The proceeds were converted to U.S. dollars to purchase capital equipment in the United States. The company wants to hedge this currency exposure and is considering the following alternatives:∙ At-the-money Swiss franc call options.∙ Swiss franc forwards.∙ Swiss franc futures.a. Contrast the essential characteristics of each of these three derivative instruments.b. Evaluate the suitability of each in relation to Michelle’s hedging objective, including both advantages and disadvantages.arrow_forwardNikularrow_forward
- Please help me, thank you! And please explain the solutions thoroughly :)arrow_forwardOn 25 July of a particular year, an American firm decided to close its account at an Australian bank on 28 August. The firm is expected to have 4 million Australian dollars in the account at the time of the withdrawal. It would then covert the funds to U.S. dollars and transfer them to a New York bank. The September Australian dollar futures contract was priced at $0.7571. Determine the outcome of a futures hedge if on 28th August the spot rate was $0.7237 and the futures rate was $0.7250. All prices are in U.S. dollars per Australian dollar. The Australian dollar futures contract covers 100,000 Australian dollarsarrow_forwardConsider a US company, GateCorp, that exports products to the United Kingdom. GateCorp has just closed a sale worth £200,000,000. The amount will be received in two months. Because it will be paid in pounds, the US company bears the exchange risk. In order to hedge this risk, GateCorp intends to use a forward contract that is priced at $1.4272 per pound. Indicate how the company would go about constructing the hedge. Explain what happens when the forward contract expires in two months.arrow_forward
- Waterway is a Canadian company that conducts many transactions in $US. Because the price of $US fluctuates daily, Waterway often enters into futures contracts as a way to manage risk. On September 1, 2023, Waterway entered into a future contract to sell US $105,000 for CDN $1.25, which was the market value on September 1. The broker with whom Waterway arranged the contract required a 20% deposit, which Waterway paid in cash. On December 31, Waterway's year-end, the price per $US was CDN $1.30. On January 1, Waterway closed out the contract at the same exchange rate, settling without delivering the cash. Prepare the journal entries to record the futures contract. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Record journal entries in the order presented in the problem. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. List all debit entries before credit entries.) Date # Account Titles…arrow_forwardAn Australia based company takes a US$1 million £ variable rate loan in the United Kingdom at LIBOR + 2%. Identify the risks on this financial transaction Identify possible ways to manage the associated risk.Describe ways to hedge FX risk onlyDescribe ways to hedge both Interest Rate Risk and FX risks.arrow_forward(d) Your firm, a Singapore company, imports electronic products from America. Your firm has purchased USD 1 million worth of products and is to pay in one month's time. The current spot rate is SGD1.40/USD. (i) (ii) (iii) Will your company be concerned about an appreciation or depreciation in the USD? Explain your answer. Your firm is considering purchasing an option to hedge the risk of the USD movements against the SGD. Should your firm purchase a USD call or put option? Justify your answer. The option your firm purchased has a strike price of SGD1.41/USD. Given that the spot rate in one month's time is SGD1.42/USD, should your firm exercise the option? Explain your reason(s).arrow_forward
- On June 1, Maxwell Corporation (a U.S.-based company) sold goods to a foreign customer at a price of 1,380,000 pesos and will receive payment in three months on September 1. On June 1, Maxwell acquired an option to sell 1,380,000 pesos in three months at a strike price of $0.100. 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 Premium for September 1 (strike price $0.100)June 1 $ 0.100 $ 0.0063 June 30 0.099 0.0041 September 1 0.098…arrow_forwardOn June 1, Maxwell Corporation (a U.S.-based company) sold goods to a foreign customer at a price of 1,100,000 pesos and will receive payment in three months on September 1. On June 1, Maxwell acquired an option to sell 1,100,000 pesos in three months at a strike price of $0.074. 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 Premium for September 1 (strike price $0.074) June 1 $ 0.074 $ 0.0037 June 30 0.073 0.0028 September 1 0.072 N/A Maxwell must close its books and prepare its second-quarter financial statements on June 30. Required: 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. a-2. What is the…arrow_forwardOn 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/Aarrow_forward
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