Assignment 4
Date
Spot Rate
Forward Rate (to January 31, 2022)
Call Option Premium for January 31, 2022 (strike price $1.119)
1-Nov-21
$ 1.119
$ 1.125
0.005
31-Dec-21
1.123
1.130
0.007
31-Jan-22
1.121
1.121
0.002
Panthers has an incremental borrowing rate of 12 percent (1 percent per month) and prepares the financial statements on December 31.
a)The wine was ordered on November 1, 2021. It was received and paid for on January 31, 2022. On November 1, Panthers purchased a three-month call option for Euro 15 million. The option was properly designated as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured through reference to changes in the spot rate. Prepare the journal entries to account for the foreign currency option, firm commitment, and import purchase. (20 points)
a)The wine was ordered on November 1, 2021. It was received and paid for on January 31, 2022. On November 1, Panthers entered into a three-month forward contract to purchase Euro 15 million. The forward contract is properly designated as a fair value hedge of a foreign currency commitment. The fair value of the firm commitment is measured through reference to changes in the forward rate. Prepare the journal entries to account for the foreign currency forward contract, firm commitment, and import purchase. (20 points)
b)Assume that Panthers has a long-term relationship with an Italian wine producer and can reliably forecast that it will need to buy Euro 15 million of the 2021 vintage in February 2022. On November 1, 2021 Panthers purchased a three-month call option for Euro 15 million. The option was properly designated as a cash flow hedge of a forecasted transaction. On February 15, 2022 Panthers places the order and pays the Italian wine producer. Prepare the journal entries to account for the foreign currency option and import purchase. (20 points)
c)Summarize the difference in income under the alternative scenarios. (10 points)
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