In the past, Baxter Manufacturing has engaged in a number of foreign currency transactions but has never before attempted to hedge these transactions. Baxter has given you three past events and asked you to illustrate how hedging could have been employed. The events are as follows:
Event A: Purchased raw materials from a foreign supplier for 100,000 FC when 1 FC = $1.100. The supplier was paid 60 days later when 1 FC = $1.150. When the goods were purchased, a 60-
Day forward contract to buy FC had a forward rateof1FC = $1.110.
Event B: Committed to sell inventory (with a cost of $120,000) to a foreign buyer for 200,000 FC when 1 FC = $1.130. Sixty days later, when the inventory was shipped, 1 FC = $1.170, and 90 days later, when the customer paid, 1 FC = $1.180. At the date of the commitment, the 90-day forward rate to sell was 1 FC = $1.150, and at the date of shipment, a 30-day forward rate was 1 FC = $1.172. Changes in the value of the commitment are based on changes in forward rates. Assume a 6%discount rate.
Event C: Forecasted needing to buy inventory with a cost of 60,000 FC in 60 days in order to meet a sale in the amount of $100,000. When the inventory was actually purchased, it had a cost of 68,000 FC. At the time of the forecast, the spot rate was 1 FC = $1.160, and a 60-day forward contract to buy FC was 1 FC = $1.150. At the time the goods were actually purchased, the spot rate was 1 FC = $1.170. For each of the above events, indicate how income would have been affected with and without the accompanying hedge.

  • CreatedApril 13, 2015
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