Sheridan is a Canadian company that conducts many transactions in $US. Because the price of $US fluctuates daily, Sheridan oftenenters into futures contracts as a way to manage risk.On September 1, 2023, Sheridan entered into a future contract to sell US $101,000 for CDN $1.20, which was the market value onSeptember 1. The broker with whom Sheridan arranged the contract required a 20% deposit, which Sheridan paid in cash. OnDecember 31, Sheridan's year-end, the price per $US was CDN $1.25. On January 1, Sheridan closed out the contract at the sameexchange 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. Donot indent manually. Record journal entries in the order presented in the problem. If no entry is required, select "No Entry" for the account titlesand enter O for the amounts. List all debit entries before credit entries.)

A futures contract is a type of common financial agreement in which two parties agree to buy or sell…

Answered: Sheridan is a Canadian company that…

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter7: International Arbitrage And Interest Rate Parity

Section: Chapter Questions

Problem 3SBD

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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…
On January 10, Volkswagen agrees to import auto parts worth $7 million from the U.S. The parts will be delivered on March 4 and are payable immediately in dollars. VW decides to hedge its dollar position by entering into IMM futures contracts. The spot rate is $1.3447/€ and the March futures price is $1.3502. On March 4, the spot rate turns out to be $1.3452/€, while the March futures price is $1.3468/€. Calculate VW’s net euro gain or loss on its futures position. $13,850 loss $13,850 gain $17,850 loss $17,850 gain
An Indian company has a receivable of USD 100,000 to be collected in one month (June). The manager of the Indian Company decided to hedge its risk through market derivatives. He contacted a Forex trader to check the available alternatives. He was provided the following information: Hedging with a forward contract One-month forward rate: INR/USD= 0.0055 Hedging with a call-option contract Exercise Price: INR/USD= 0,0050 Premium: 5% of the value of the option Contract Size: USD 50,000 Maturity: June Hedging with a put-option contract Exercise Price: INR/USD= 0,060 Premium: 2% of the value of the option Contract Size: USD 100,000 Maturity: June Which derivative is the best for this Indian company if on June the exchange rate is INR/USD= 0.062?
NGW, a consumer gas provider, estimates a rather cold winter. as a result it decides to enter into a futures contract on the nymex for natural gas on november 2, 2016. the trading unit is 10,000 million british thermal units (mmbtu). the three-month futures contract rate is $7.00 per mmbtu, so each contract will cost ngw $70,000. in addition, the exchange requires a $5,000 deposit on each contract. ngw enters into 20 such contracts. REQUIRED: why is this futures contract likely to be considered an effective hedge and therefore qualified for hedge accounting? why would this transaction be accounted for as a cash-flow hedge? assume that the december 31, 2016, futures contract rate is $6.75 for delivery on february 2, 2017, and the spot rate on february 2, 2017, is $6.85. assume that ngw sells all of the gas on february 3, 2017, for $8.00 per mmbtu. prepare all the necessary journal entries from november 2, 2016, through february 3, 2017, to account for this hedge situation.
On November 1, 2017, Dos Santos Company forecasts the purchase of raw materials from a Brazilian supplier on February 1, 2018, at a price of 200,000 Brazilian reals. On November 1, 2017, Dos Santos pays $1,500 for a three-month call option on 200,000 reals with a strike price of $0.40 per real. Dos Santos properly designates the option as a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2017, the option has a fair value of $1,100. The following spot exchange rates apply: Date U.S. Dollar per Brazilian real November 1, 2017 $0.40 December 31, 2017 0.38 February 1, 2018 0.41 What is the net impact on Dos Santos Company’s 2017 net income as a result of this hedge of a forecasted foreign currency transaction? Choose the correct.a. $–0–.b. $400 decrease in net income.c. $1,000 decrease in net income.d. $1,400 decrease in net income.
On November 1, 2017, Dos Santos Company forecasts the purchase of raw materials from a Brazilian supplier on February 1, 2018, at a price of 200,000 Brazilian reals. On November 1, 2017, Dos Santos pays $1,500 for a three-month call option on 200,000 reals with a strike price of $0.40 per real. Dos Santos properly designates the option as a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2017, the option has a fair value of $1,100. The following spot exchange rates apply: Date U.S. Dollar per Brazilian real November 1, 2017 $0.40 December 31, 2017 0.38 February 1, 2018 0.41 What is the net impact on Dos Santos Company’s 2018 net income as a result of this hedge of a forecasted foreign currency transaction? Assume that the raw materials are consumed and become a part of the cost of goods sold in 2018. Choose the correct.a. $80,000 decrease in net income.b. $80,600 decrease in net income.c. $81,100 decrease in net income.d. $83,100 decrease in…
An FI is planning to hedge its one-year, 100 million Swiss franc (SF)-denominated loan against exchange rate risk. The current spot rate is $0.60/SF. A 1-year SF futures contract is currently trading at $0.58/SF. SF futures are sold in standardized units of SF125,000. Should the FI be worried about the SF appreciating or depreciating? Should it buy or sell futures to hedge against exchange rate risk exposure? How many futures contracts should it buy or sell if a regression of past spot exchange rates on changes in future exchange rates generates an estimated slope of 1.4? Show exactly how the FI is hedged if it repatriates its principal of SF100 million at year-end, the spot exchange rate of SF at year-end is $0.55/SF, and the forward exchange rate is $0.5443/SF.
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…
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…
On January 1, 2017, Roxan Company sold equipment to Mitsuko Company of Japan for ¥20,000,000 with payment to be received in two years on January 1, 2019. On January 1, 2017, the exchange rate is ¥0.50 = P1. On the same date, Roxan enters into a futures contract and agrees to sell ¥20,000,000 on January 1, 2019 at the rate of ¥0.50 = P1. On December 31, 2017, the exchange rate is ¥0.47 = P1. On December 31, 2019, the exchange rate is ¥0.55 = P1. The appropriate discount rate throughout this period is 10%. Required: Make all journal entries necessary on Roxan Company's books in 2017, 2018, and 2019 to record this sale, the futures contract and the collection of the receivables.
You enter into a futures contract to buy €125,000 at $1.53 per euro. The spot exchange rate when you enter the contract is $1.63. Your initial performance bond is $6,100 and your maintenance level is $2,400. At what settle price will you get a demand for additional funds to be posted to your account? 1.6596 1.7596 1.8896 1.5004 1.5596 1.6004
Assume that you are running an Australia based company which has an account payable of EUR 125,000 due in three months. You decide to hedge out the associated foreign exchange risk using futures contracts. A futures contract of EUR125,000 is selling at A$1.5410 per euro. Suppose the next three days’ settlement prices are A$1.5399, A$1.5480, and A$1.5410. The initial margin of your performance bond account is $2,000 and maintenance margin is $1,500. What is your margin account balance at the end of the first day and what is the balance of this account at the end of the third day?

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