Discussion: Option and Firm Commitment Journal Entries
The Zermatt Company ordered parts from a foreign supplier on November 20 at a price of 100,000 francs when the spot rate was $0.80 per peso. Delivery and payment were scheduled for December 20. On November 20, Zermatt acquired a call option on 100,000 francs at a strike price of $0.80, paying a premium of $0.008 per franc. The option is designated as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured through reference to changes in the spot rate. The parts are delivered and paid for according to schedule. Zermatt does not close its books until December 31.
Using Excel, prepare the following journal entries:
• Assuming a spot rate of $0.83 per franc on December 20, prepare all journal entries to account for the option and firm commitment.
• Assuming a spot rate of $0.78 per franc on December 20, prepare all journal entries to account for the option and firm commitment.