Hedging:
Hedging against an investment risk is termed for strategically implementing the instruments and tools in the market to minimize the risk and effects of any adverse price movements. It can be said that investors are benefitted through hedging as they hedge one investment by making another investment.
To calculate:
A schedule by showing its effect on current earnings through hedging relationship.
Answer to Problem M.6P
Total net loss from call option B is
Explanation of Solution
Calculation of change in time value excluded from effectiveness as follows:
Note:
Consecutively for next months
Call option B
Particulars | July (in $) | August (in $) | September (in $) | Total(in $) |
Unrealized gain (loss): | ||||
| | | ||
| | | ||
| | | ||
Net gain (loss) | | | | |
Calculation of unrealized gain (loss) as follows:
Note:
Hedge is not effective which does not quality for special hedge.
Put Option C
Particulars | July (Amount be $) | August (Amount in $) | September (Amount In $) | Total (Amount be $) |
Sales revenue | | | ||
Cost of sales | | | ||
Adjustment to cost of sales — Intrinsic value at July 1 of $0 versus intrinsic value at | | | ||
Gross profit on sales | | | ||
Change in time value excluded from effectiveness. | ||||
Time value of | | | ||
Time value of | | | ||
Time value of | | | ||
Net gain (loss) | | | | |
Working note:
Calculation of adjustment to cost of sales as follows:
Futures contract D
Particulars | July (Amount in $) | August (Amount in $) | September (Amount in $) | Total (Amount in $) |
Change in the time value excluded from effectiveness: | | | | |
Net gain (loss) | | |
Note:
Numbers of units is 10,000 future prices of $10per unit.
Interest rate swap:
Particulars | July (Amount in SI | August (Amount in $) | September (Amount in SI | Total (Amount in S) |
Variable interest income | ||||
| | | ||
| | | ||
| | | ||
Settlement of fixed variable difference: | ||||
| | | ||
| | | ||
Net interest Income | | | | |
Note:
LIBOR for July is
LIBOR for August is
LIBOR for September is
Fixed rate of interest is
Conclusion
Total net loss from call option B is
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Chapter 9 Solutions
Advanced Accounting
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