Question

1. On June 1, 2008, a U.S. firm contracts to sell equipment (with an asking price of 2,000,000 krona) in Sweden. The firm will take delivery and will pay for the equipment on August 1, 2008.
2. Spot rates were as follows (dollars per krona):
Spot Rate
June 1, 2008...... $0.107
August 1, 2008...... 0.102
3. On August 1, the equipment was sold for 2,000,000 krona. The cost of the equipment was $100,000.
Suppose that on June 1, 2008, the firm believes, based on recent changes in the economy, that there is a high probability of exchange rate losses from the transaction. If the firm acquires an option to hedge the transaction, answer the following questions.

Required:
A. Does the firm believe that the krona is strengthening or weakening relative to the U.S. dollar?
B. What kind of option should the firm use: a put or a call option?
C. Suppose the following options are available. Each option can only be exercised on August 1. Choose the option that should be used to hedge the transaction and prepare all journal entries needed to record the hedge and the transaction to sell theequipment.


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  • CreatedMarch 13, 2015
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