December 1, 2019, Joe, a U.K. company, purchases on account from Joe, a U.S. customer, for 712,850

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Question:

December 1, 2019, Joe, a U.K. company, purchases on account from Joe, a U.S. customer, for 712,850 USD Joe agrees to pay in GBP by bank account on March 1, 2020.

Spot rate as of December 1, 2019: 1 GBP (£) = 1.24 USD ($)

Spot rate as of December 31, 2019: 1 GBP (£) = 1.26 USD ($)

Spot rate as of March 1, 2020: 1 GBP (£) = 1.3 USD ($) Joe has a December 31 year end.

Required:

2.1. How should Joe record the sales on December 1, 2019; the foreign exchange gain/loss on December 31, 2019 and on March 1, 2020? (Round to the nearest $) (1.5 marks)

2.2 In the above case, does the USD depreciate or appreciate against GBP? (0.5 marks)

2.3. at December 1, 2019, Joe expected that the USD will be depreciated against GBP significantly and the company want to hedge this exchange risk by purchasing a call option to buy 712,850 USD from a bank at a strike price of 1.28 USD/GBP. Determine whether Joe should exercise the option and the amount of GBP Joe has to pay in 3 months to settle its liability. (0.5 marks)