International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Shandra Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 100,000 pounds, with delivery and payment to be made on April 20. On February 20, when the spot rate is $1.36 per pound, Shandra purchases a two-month call option on 100,000 pounds and designates this option as a cash flow hedge of a forecasted foreign currency transaction. The time value of the option is excluded in assessing hedge effectiveness; the change in time value is recognized in net income over the life of the option. The option has a strike price of $1.36 per pound and costs $1,000. The goods are received and paid for on April 20. Shandra sells the imported goods in the local market by May 31. The spot rate for pounds is $1.41 on April 20. What amount will Shandra Corporation report as foreign exchange gain or loss in net income for the quarter ended June 30?
$5,000.
$0.
$1,000.
$2,000.
Use the following information for Problems 15 through 17.On September 1, 2017, Jensen Company received an order to sell a machine to a customer in Canada at a price of 100,000 Canadian dollars. Jensen shipped the machine and received payment on March 1, 2018. On September 1, 2017, Jensen purchased a put option giving it the right to sell 100,000 Canadian dollars on March 1, 2018, at a price of $80,000. Jensen properly designated the option as a fair value hedge of the Canadian dollar firm commitment. The option cost $2,000 and had a fair value of $2,300 on December 31, 2017. The fair value of the firm commitment was measured by referring to changes in the spot rate. The following spot exchange rates apply.Jensen Company’s incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803.What was the net impact on Jensen Company’s 2018 income as a result of this fair value hedge of a firm…
Use the following information for Problems 15 through 17.On September 1, 2017, Jensen Company received an order to sell a machine to a customer in Canada at a price of 100,000 Canadian dollars. Jensen shipped the machine and received payment on March 1, 2018. On September 1, 2017, Jensen purchased a put option giving it the right to sell 100,000 Canadian dollars on March 1, 2018, at a price of $80,000. Jensen properly designated the option as a fair value hedge of the Canadian dollar firm commitment. The option cost $2,000 and had a fair value of $2,300 on December 31, 2017. The fair value of the firm commitment was measured by referring to changes in the spot rate. The following spot exchange rates apply.Jensen Company’s incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803.What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge…
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- Speculating with Currency Call Options. ABC Inc., purchased 75,000 units call option on British pounds for $.021 per unit. The strike price was $ 0.78 and the spot rate at the time the option was exercised was $0.98. Assume there are 25,000 units per British pound option. What was ABC's net profit option?arrow_forwardHSL Inc., a U.S.-based MNC, imports goods from Canada, and HSL Inc. records its payables in Canadian dollars. If the Canadian dollar will appreciate in the near future, you would _______. I. purchase Canadian dollars forward II. purchase Canadian dollar futures contracts III. purchase Canadian dollar put options IV. purchase Canadian dollar call options A. III, IV B. II, III C. I, II, IV D. I, IIarrow_forwardSpeculating with Currency Call Options. ABC Inc., purchased 75,000 units call option on British pounds for $.021 per unit. The strike price was $ 0.78 and the spot rate at the time the option was exercised was $0.89. Assume there are 25,000 units per British pound option.arrow_forward
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