In August, our company sells inventory to a customer in Switzerland, receivable in Swiss Francs (CHF). The
Question:
In August, our company sells inventory to a customer in Switzerland, receivable in Swiss Francs (CHF). The receivable is CHF200,000 and the exchange rate on the date of sale is $1.20:CHF1. Payment is due in 60 days. Our company feels that the $US has been over-sold and is likely to rebound during the next 60 days, thus lowering the $US equivalent of the receivable. The current forward price for 90-day delivery of $1.15 reflects our view. Since we feel that the $US is likely to strengthen even more, we purchase a forward contract to sell Swiss Francs at $1.15 60 days hence. When the receivable is collected in 60 days, the exchange rate at that date is $1. 05: CHF1.
Assume the following data relating to the spot and forward rates for the $US in relation to the CHF:
Spot rate | Forward Rate | |
August | $1.20 : CHF1 | $1.15 : CHF1 |
Sept. 30 | $1.10 : CHF1 | $1.07 : CHF1 |
October | $1.05 : CHF1 | $1.05 : CHF1 |
Prepare the FV Hedge transaction journal entry for AUGUST.
