Alexandria Company prepares its financial statement in US$. On November 1, Year
ID: 2808693 • Letter: A
Question
Alexandria Company prepares its financial statement in US$. On November 1, Year 1, Alexandria Company receives a non-cancelable order (a purchase order) from a foreign customer for 100,000 francs to be received when goods are sold on April 30, Year 2. On November 1, Year 1, Alexandria Company entered into a six-month forward contract to sell 100,000 francs on April 30, Year 2. Alexandria designates the forward contract as a fair value hedge of a firm commitment. The fair value of the hedge is to be determined from the spot rates.
Relevant exchange rates for the franc are:
Date
Spot Rate
Forward Rate
(to April 30, Year 2)
November 1, Year 1
$0.51
$0.48
December 31, Year 1
0.40
0.38
April 30, Year 2
0.45
Alexandria’s incremental borrowing rate is 12%.
The forward contract is properly designated as a fair value hedge of a firm commitment.
Date
Spot Rate
Forward Rate
(to April 30, Year 2)
November 1, Year 1
$0.51
$0.48
December 31, Year 1
0.40
0.38
April 30, Year 2
0.45
Explanation / Answer
Spot rate as on 30 April = 0.45
Forward rate as on 30 April= 0.48
Present value as on november 1= 100000*0.51=51000
Forward Rate is on 30th April=$0.48=100000*0.48=48000
Difference= 51000-48000=3000
100000*0.45-100000*0.48=-3000 loss
100000 francs*0.48-0.45= francs
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