On December 1, Y1, Alexander Inc., a US based importer of olive oil placed an order for
Question:
On December 1, Y1, Alexander Inc., a US based importer of olive oil placed an order for 500 cases of olive oil at a price of 100 Euros per case. The pertinent exchange rates are given below.
DATE | SPOT RATE | FORWARD RATE (to January 31, Y2) | CALL OPTION PREMIUM FOR 1/31/Y2 (Strike price of $1) |
12/1/Y1 | $1.00 | $1.08 | $0.04 |
12/31/Y2 | $1.12 | $1.20 | $0.12 |
1/31/Y2 | $1.15 | $1.15 | $0.15 |
Alexander Inc. has effective borrowing rate of 12% (1% per month). The company’s fiscal year ends on December 31. Present value factor at 1% per month is 0.9901.
The olive oil was ordered on December 1, Y1. It was received and paid for on December 31, Y2. On December 1, Y1, Alexander Inc. purchased a two-month call option for 50,000 Euros. The option was properly designated as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured through reference to change in the spot rate.
Prepare journal entries to account for foreign currency option, firm commitment, and import purchase.
Business Statistics a decision making approach
ISBN: 978-0133021844
9th edition
Authors: David F. Groebner, Patrick W. Shannon, Phillip C. Fry