Question

In several instances, Neibler Corporation has been engaged in transactions that were denominated or settled in foreign currencies (FC). Given recent volatility in exchange rates between the U.S. dollar and the FC, the company is considering using FC derivatives in a number of instances.
In order to communicate to management the impact of hedging, you have been asked to develop a schedule relating to several hypothetical situations. Hypothetical A involves the purchase of inventory in the amount of 100,000 FC with payment due in 60 days. Assume that the hedge would involve:
(a) An option to buy 100,000 FC in 60 days and
(b) A forward contract to buy 100,000 FC in 60 days. In both cases, the hedge is to be considered a fair value hedge.
Hypothetical B involves the same facts as Hypothetical A except that the hedge is to be considered a cash flow hedge. Hypothetical C involves a commitment to sell inventory in 90 days for 100,000 FC.
Assume that the hedge would involve:
(a) An option to sell 100,000 FC in 90 days and
(b) A forward contract to sell 100,000 FC in 90 days. In both cases, the hedge is to be considered a cash flow hedge. In the case of the option, changes in the value of the commitment are to be measured by changes in spot rates over time, whereas in the case of the forward contract, changes in the value of commitment are measured based on changes in forward rates. The inventory sold has a cost of $100,000.
Hypothetical D involves a 90-day 100,000 FC note receivable bearing interest at 6%. Both principal and interest are payable at maturity, and it is assumed that an option to sell 100,000 FC will be employed as a cash flow hedge.
Hypothetical E involves a forecasted sale of inventory in 90 days for 100,000 FC. Assume that the inventory has a cost of $110,000 and a forward contract to sell 100,000 FC in 90 days is the hedging instrument. Selected rate information is as follows:
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Required
For each of the above hypothetical situations, prepare a schedule to show the activity in balance sheet accounts and income statement accounts over the course of the events assuming:
(1) No hedging and
(2) Hedging. With respect to the balance sheet accounts, show the balance in the derivative just prior to settlement and ignore an analysis of cash or foreign currency balances.


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  • CreatedApril 13, 2015
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