A U.S. company purchases inventory from a foreign vendor and purchases are denominated in the foreign currency (FC). The U.S. dollar is expected to weaken against the FC. Explain how a forward contract might be employed as a hedge against exchange rate risk.
Answer to relevant QuestionsExplain how a U.S. company’s commitment to purchase inventory with settlement in foreign currency (FC) might become less attractive over time and how adverse effects on earnings could be reduced. Stark, Inc., placed an order for inventory costing 500,000 FC with a foreign vendor on April 15 when the spot rate was 1 FC = $0.683. Stark received the goods on May 1 when the spot rate was 1 FC = $0.687. Also on May 1, ...Clayton Industries sells medical equipment worldwide. On March 1 of the current year, the company sold equipment, with a cost of $160,000, to a foreign customer for 200,000 Euros payable in 60 days. At the same time, the ...Assume that a U.S. company has a foreign subsidiary whose functional currency is the U.S. dollar. Explain how exchange rates between the foreign currency and the dollar would have to change in order to result in a ...In order to demonstrate the use of the re-measurement process, assume that at the beginning of the year a U.S. parent company invested 100,000 foreign currency B (FCB) to form a 100% owned subsidiary. The subsidiary ...
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