Problem $10-1($LO $5)$ FC transactions, commitments, forecasted transactions

earnings impact. Jarvis Corporation transacts busincss with a number of forcign vendors and

customers. These transactions are denominated in FC$,$ and the company uses a number of hedging

strategies to reduce the exposure to exchange rate risk. Several such transactions are as follows:

Transaction A: On November $30,$ the company purchased inventory from a vendor in the

amount of $100,000$ FC with payment due in $60$ days. Also on November $30,$ the company pur$-$

chased a forward contract to buy FC in $60$ days. Assume a fair value hedge.

Transaction B: On November $1,$ the company committed to provide services to a foreign

customer in the amount of $100,000$ FC$.$ The services will be provided in $30$ days. On Novem$-$

ber $1,$ the company also purchased a forward contract to sell $100,000FC$ in $30$ days. Changes

in the valuc of the commitment are based on changes in forward rates.

Transaction C: On November $1,$ the company forecasted a purchase of equipment in $30$

days. The forecasted cost is $100,000FC,$ and the equipment is to be depreciated over five ycars

using the straight$-$line method of depreciation. On November $1,$ the company acquired a for$-$

ward contract to buy $100,000FC$ in $30$ days.

Transaction D: On November $30,$ the company purchased an oprion to sell $100,000FC$ in

$60$ days to hedge a forecasted sale to a customer in $60$ days. The option sold for a premium of

$$1,200$ and had a strike price of $$1\mathrm{.}155.$ The value of the option on December $31$ was $$2,000.$

Relevant spot and forward rates are as shown below.

$*****$Assuming that the company's year$-$end is December $31,$ for each of the above transactions deter$-$

mine the current$-$year effect on carnings. All necessary discounting should be determined by

using a $6\%$ discount rate. For transactions $C$ and $D,$ the time value of the hedging instrument is

excluded from hedge effectivencss and is to be scparatcly accounted for.