Case for Assignment
Type of Hedges I've selected or used: Cash Flow Hedges and Foreign Currency Hedges.
Assignment Choice: Hedging Mechanics Case
Review the Case for Assignment Choice 1 (linked at the bottom of the page). Prepare a submission in Microsoft Word that does the following:
1. Explains the type(s) of hedge(s) used
2. Shows the journal entries used to record all hedging activities that are shown in the list of transactions.
Requirements:
Remember to maintain a formal tone arid cite scholarly research to support your analysis. (Note: You may not use the course textbook to fulfill this requirement.)
Your analysis should be 2-3 pages in length, not counting the required title and reference pages (citing at least one source), and must be formatted according to the CSU-Global Guide to Writing and AP4 Requirements
Review the grading rubric to understand how you will be graded on this assignment. Reach out to your instructor if you have questions about the assignment.
ParentCo is a calendar year domestic corporation that ordered Product X from ExternalCo (foreign corporation) on November 1, 2013. The cost of Product X is 1,000,000FC (the foreign currency denomination). They enter into an agreement for the delivery of Product X by January 31, 2014. ParentCo entered into a forward exchange contract to acquire 1,000,000FC at a forward rate of $1.23/FC on January 31, 2014. Currently, the exchange rate between U.S. and the foreign country is $1.20/FC.
|
|
November 1,2013
|
December 31,2013
|
January 31,2014
|
|
Spot Rate
|
$ 1.20
|
$1.25
|
$ 1.30
|
|
Forward Rate
|
$ 1.23
|
$ 1.26
|
$ 1.30
|
Using the applicable rates from above, explain the type of hedge that is being used and show the journal entries for all related transactions on 11/1/2013, 12/31/2013 and the 1/31/2014. In addition, show the effectiveness of the hedge. Explain how the journal entries affect the balance sheet and income statement of ParentCo use examples to support your responses). Describe the effectiveness of the hedge. Show and explain all calculations.
Note: ParentCo prepares year-end financial statements on 12/31/2013.