Question: Problem 10-1 (LO 5) FC transactions, commitments, forecasted transactions earnings impact. Jarvis Corporation transacts business with a number of foreign vendors and customers. These transactions

Problem 10-1 (LO 5) FC transactions, commitments, forecasted transactions earnings impact. Jarvis Corporation transacts business with a number of foreign 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 100,000 FC in 30 days. Changes in the value 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 100,000 FC, and the equipment is to be depreciated over five years using the straight-line method of depreciation. On November 1, the company acquired a for- ward contract to buy 100,000 FC in 30 days. Transaction D: On November 30, the company purchased an option to sell 100,000 FC 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 $1.155. The value of the option on December 31 was $2,000. Relevant spot and forward rates are as shown below. Forward Rate for 30 Days Forward Rate for 60 Days Spot Rate from November 1 from November 30 November 1 . . 1 FC = $1.120 1 FC - $1.132 November 15 . . 1 FC =$1.130 November 30 1 FC = $1.150 1 FC = $1.146 December 31. . . 1 FC = $1.140 1 FC = $1.138 Assuming that the company's year-end is December 31, for each of the above transactions deter- mine the current-year effect on earnings. 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 effectiveness and is to be separately accounted for

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