Problem 1:
On 3/1/15, Alex company sells goods to a foreign customer at a price of 1,000,000 euros. It will receive payment in 3 months on 9/1/15. Relevant exchange rates and option premium for the euros are as follows:
|
Rate Date
|
Option Premium
|
Spot Rate
|
Forward
|
|
6/1/15
|
0.035
|
1.10
|
1.09
|
|
6/30/15
|
0.065
|
1.05
|
1.07
|
|
9/1
|
N/A
|
N/A
|
N/A
|
Alex Company must close its books and prepare its second-quarter financial statements on 6/30.
The following A & B are independent situations.
A. On 6/1, Alex enters into a forward contract to sell 1,000,000 euros on 9/1/15. Alex incremental borrowing rate is 12% annually. Alex designates the forward contract as a fair value hedge of a foreign currency receivable. Prepare JEs for these transactions in U.S Dollars.
B. On 6/1, Alex acquired on option to sell 1,000,000 euros in 3 months at a strike price of $1.10 with a maturity date of 9/1/15. Alex designates the foreign currency option as a cash flow hedge of a foreign currency receivable. Prepare JEs for 3 transactions in U.S dollars.