Question: 1. Briefly identify key distinctions between spot rates, forwards, and options in the context of foreign currency exchange rates. Assume that Lotus Inc. hedged their credit sale transaction. Given a volatile market (i.e., exchange rates fluctuate) at the time of cash receipt and the firm has used a forward contract, what are the possible outcomes? How would this differ if the firm had used options instead?
2. (A) TRX, from Waltham, MA is a global firm that produces gadgets. It imports widgets, an important component of gadgets from Brazil, and exports gadgets to several countries, including Germany. TRX records international transactions using the two- transaction method: recognizing gains/losses at year-end and when final payments are recorded. TRX closes their books on December 31 of each year. The following two transactions took place during the year (2009). First, the firm imported 50,000 widgets from Brazil for Real (R$) 5 per widget. This credit transaction, on December 10, was to be completed on January 31, when the cash payments would need to be made to the seller. Second, the firm made a credit sale of 20,000 gadgets at 15 Euros each to a customer in Germany. The sale was made on December 15, 2009 and cash was to be received on January 15 of the next year. Provide all entries necessary to record each of these transactions in December and January. What is the impact of the transactions on the income statement and balance sheet as of 12/31?