Foreign Currency Hedging

Foreign Currency Hedging   Part II: Problem Solving      1. On  November  1,  2020,  an  entity  acquired  on  account  goods from a foreign supplier at a cost of $1,000. The  accounts payable are paid on January 30, 2021.    On  December  1,  2020,  an  entity  sold  on  account  the  said  goods  to  a  foreign  customer  at  a  selling  price  of  $1,500. The accounts receivable are collected on February 28, 2021.    The entity is operating in Philippine economy wherein the functional currency is the Philippine Peso.    The following direct exchange rates are provided:      Buying spot rate  Selling spot rate    November 1, 2020  P40  P42  December 1, 2020  39  40  December 31, 2020  45  47    1. What is the sales revenue for 2020?    a. 58,500  b. 60,000  c. 67,500  d. 72,000    2. What is the carrying amount of accounts receivable on December 31, 2020?    a. 58,500  b. 60,000  c. 67,500  d. 72,000    3. What is the carrying amount of accounts payable on December 31, 2020?    a. 40,000  b. 42,000  c. 45,000  d. 47,000    4. What is the net foreign currency gain for 2020?    a. 4,000  b. 5,000  c. 3,000  d. 6,000      2. Vector  Corporation  issued a promissory note denominated in foreign currency for the purchase made from a  supplier  in England on December 1, for a 60-day, 18% promissory note for 108,000 pounds, at a selling rate  of  1FC  to  P74.20.  On  December  31,  the  selling  spot  rate  is  1FC  to  P74.85. On January 30, the selling spot  rate is 1FC to P75.75.     On the settlement date, how much is the foreign exchange gain/loss?    a. 172,422 gain  b. 100,116 loss  c. 172,422 loss  d. 98,658 loss    3. Uragon  Company  sold  warehouse  facilities  for  $8,340,000  to  a  customer  in  Oregon,  USA  on  November  02,  2020.  Collection  in  US  dollars  was  due  on  January  31,  2021.  On  the  same  date,  to  hedge  this  foreign  currency  exposure,  Uragon  Company  entered  into  a  forward  contract  to  sell  $8,340,000  to Export bank for  delivery on January 31, 2021. Indirect exchange rates on different dates were as follows:      Nov. 2 Dec. 31  Jan. 31    Spot rate     .02387  .02457 .02494  30-day futures   .02364 .02475 .02278  60-day futures   .02392 .02481 .02437  90-day futures   .02463 .02403 .02304    1. How  much  is  the  effect  on  earnings due to hedged item in the December 31, 2020 profit and loss  statement?    a. (10,008,000)  b. ( 5,838)  c. 10,008,000  d. 5,838   

2. How  much  is  the  effect  on  earnings  due  to  hedging  instrument  in  the  2021  profit  and  loss  statement?    a. 2,502,000  b.   1,585  c. (2,502,000)   d. ( 1,585) 

    4. Barako  Company  acquired  a  heavy  equipment  for  $14,100  from  a  supplier  in  Detroit, USA on December 1,  2020.  Payment  in  US  dollars  was  due  on March 31, 2021. On the same date, to hedge this foreign currency  exposure,  Barako  entered  into  a  forward  contract  to  purchase  $14,100 from Citibank for delivery on March  31, 2021. Direct exchange rates for dollars on different dates were as follows:  ​Spot Rates     Bid  Offer      December 1, 2020   41.6   41.4   December 31, 2020   42.5 42.3   March 31, 2021   43.4 43.7     Forward Rates    Dec. 1  Dec. 31  March 31  30-day futures 42.3 41.8   43.2  60-day futures 41.8 42.2   42.6  90-day futures 40.6 42.5   43.4  120-day futures    42.2 42.8 42.9     1. What is the reported value of the liability to the vendor at December 31, 2020?    a. 596,430   b. 599,250   c. 596,400    d. 599,200     2. What is the net impact in Barako Company’s income in 2020 as a result of this hedging activity?    a. 8,460 net gain  b. 8,460 net loss  c. 8,500 net gain  d. 8,500 net loss          5. On  November  2,  2020,  P  Corp  entered  into  a  firm  commitment  with  Japanese  firm  to  acquire  equipment,  delivery  and  passage  of  title  on  March 31, 2021, at a price of 4,375 yen. On the same date, to hedge against  unfavorable  changes  in  the  exchange  rate  of  the  yen,  P  Corp.  entered  into  a  150 day forward contract with  BPI for 4,375 yen. The relevant exchange rates were as follows:      11/2/2020  12/31/2020  3/31/2021  Spot Rate  P37  P38  P35  Forward Rate  P40  P33  P35      1. What  is  the  foreign  currency  gain/(loss)  due  to  the  change  in  the  fair  value  of  the  underlying  purchase commitment on December 31, 2020?  a. 30,625 gain  b. 30,625 loss  c. 4,375 gain  d. 4,375 loss    2. What is the amount debited to the equipment account?  a. 161,875 on 11/2/2020   b. 175,000 on 11/2/2020  c. 153,125 on 3/31/2021  d. 175,000 on 3/31/2021      6. On  November  1,  2020,  7D  Co.  entered  into  a  firm  commitment  with  Toki-Toki  Japanese  Company  for  the  export  of  dried  mangoes  with  a  contract  price  of  10,000  Yen.  The  goods  will  be  delivered  by  7D  Co.  on  January  30,  2021.  On  the  same  day,  in  order  to  protect  itself  from  the  risk  of  changes  in  fair  value  of  the  firm  commitment  due  to  changes  in  underlying  foreign  currency,  7D  Co.  entered  into  a  forward  contract  with  BDO  for  the  sale of 10,000 Yen at the forward rate on November 1, 2020. IAS 39 provides that hedge of  the  foreign  currency  risk  of  a  firm  commitment may be accounted for as either fair value hedge or cash flow  hedge.  7D  Co.  elected  to  account for the hedge of the firm commitment using fair value hedge. The following  direct exchange rates are provided:    November 1, 2020 December 31, 2020 January 30, 2021  Buying spot rate P10 P13 P12  Selling spot rate P13 P15 P16  Forward buying 90-daysP11 P14 P15  Forward selling 90-days P13 P16 P17 

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Forward buying 60-daysP14 P17 P16  Forward selling 60-days P15 P18 P14  Forward buying 30-daysP11 P15 P12  Forward selling 30-days P13 P11 P14    What  is  the  foreign  currency  gain/(loss)  due  to  hedged  item  for  the  year  ended  December  31,  2020?  a. 40,000 gain  b. 20,000 loss  c. 30,000 gain  d. 10,000 loss    What  is  the  foreign  currency  gain/(loss)  due  to  hedging  instrument  for the year ended December  31, 2021?  a. 50,000 loss  b. 30,000 gain  c. 20,000 gain  d. 20,000 loss   

  EXERCISES  1. PAS 39 enumerated the following three types of hedging relationships, except  a. Fair  value  hedge:  a  hedge  of  the  exposure  to changes in fair value of a recognized asset (AFS Securities)  or  liability  or  an  unrecognized  firm  commitment,  or  an  identified  portion  of  such  an  asset,  liability  or  firm commitment, that is attributable to a particular risk and could affect profit or loss.  b. Cash  flow  hedge:  a  hedge  of  the  exposure  to  variability  in  cash  flows  that  (1)  is  attributable  to  a  particular  risk  associated  with  a  recognized  asset  or  liability  (such  as  all  or  some  future  interest  payments on variable rate debt) or (2) a highly probable forecast transaction and (2) could affect profit or  loss.  c. Hedge  of  a  net investment in foreign operation which is the hedge of the amount of the reporting entity’s  interest in the net assets of the operation.  d. Undesignated hedge such as hedge of foreign currency denominated payable or receivable.      2. In case of hedging transaction designated as fair value hedge, which of the following statements is correct?  a. The  gain  or  loss  from  remeasuring  the  hedging  instrument/derivative  designated  as  fair  value  hedge  shall be recognized in profit or loss.  b. The  gain  or  loss  on  the  changes  in  fair value of hedged item/(AFS Securities) attributable to the hedged  risk shall adjust the carrying amount of the hedged item and be recognized in profit or loss.  c. Both A and B.  d. Neither A nor B.      3. In case of hedging transaction designated as cash flow hedge, which of the following statements is correct?  a. The  portion  of  the  gain  or loss on the hedging instrument/derivative designated as cash flow hedge that  is  determined  to  be  an  effective  hedge  or  the  change  in  intrinsic  value  of  the  derivative  designated  as  cash flow hedge shall be recognized in other comprehensive income.  b. The  ineffective  portion  of  the  gain  or  loss  on  the hedging instrument/derivative designated as cash flow  hedge  or  the  change  in  time  value  of the derivative designated as cash flow hedge shall be recognized in  profit or loss.  c. The  cumulative  other  comprehensive  income  recognized  in  equity  arising  from  cumulative  changes  in  intrinsic  value  of  derivatives  designated  as  cash flow hedge shall be reclassified from equity/cumulative  OCI  to  profit  or  loss  as  a  reclassification  adjustment  in  the  same  period  during  which  the  hedged  forecast cash flows affects profit or loss.  d. All of the above.    4.   Lastikman  Company,  a  local  company,  bought  raw  materials  as  ingredients  in  its  products  from  Superman  Corporation,  a  US  company, for 35,000 US Dollars in 2020. Pertinent exchange rates relating  to this transaction are as follows:  Buying Rate Selling Rate  Receipt of order P47.10 P47.20   Date of shipment 47.25 47.45   Balance sheet date 49.50 49.60  Settlement date 49.45 49.50    What is the foreign exchange gain or loss of Lastikman Company for 2020?  a. 78,750 loss   b. 75,250 loss   c. 78,750 gain   d. 75,250 gain    What is the value of the inventory, assuming it’s not yet sold, as of settlement date?  a. 1,652,000   b. 1,660,750   c. 1,732,500   d. 1,653,750     5. Kline  Company  purchased  inventory  on  November  30,  2018  for  $10,000  payable  March  1,  2019.  On  December  1,  2018,  the  entity  entered  into  a  forward  contract  to  purchase  $10,000  and  to  be  delivered  on  February  28,  2019  to  hedge  the  purchase  of  inventory  on  November  30,  2018. The relevant exchange rates  are: 

    11/30/2018  12/01/2018  12/31/2018  02/28/2019  03/1/2019  Spot rate  45  46  50  51  55  Forward buying 90-days  44  43  42  41.5  45  Forward selling 90-days  47  48  42.5  44.5  46  Forward buying 60-days  50  51.5  48.5  54  50  Forward selling 60-days  52  53.5  51  55  51.5  Forward buying 30-days  55  50.5  49.5  56.5  47.5  Forward selling 30-days  54  51  52.5  53  56    What  amount  of  foreign  currency  transaction  gain  from  the  forward  contract  should  be  included  in  net  income for 2018?  a. 50,000  b. 40,000  c. 30,000  d. 0    What  amount  of  foreign  currency  transaction  loss  should  be  included  in  income  from  the  revaluation  of  accounts payable for 2018?  a. 40,000  b. 50,000  c. 10,000  d. 0    Answer  1. D  2. C  3. D  4. B/B  5. C/B