C7 Hedging Foreign Currency Exchange Rate Risk May 16, 2024

Instruction: Answer each problem with accurate solution. Provide your own solution paper.

Problem 1. On December 1, 20x1, Pepper Corporation entered into a forward exchange contracts for speculative
purposes in anticipation for a gain to sell US$10,000 in 90 days for delivery on March 1, 20x1 for P40.25. The
fiscal year-end for Pepper Corporation is December 31. The exchange rates available on various dates are as
follows: (SPECULATION TO SELL CURRENCY)
December 1, 20x1 December 31, 20x1 March 1, 20x1
SPOT RATE P40.00 P40.25 P40.35
30 DAY FORWARD RATE P40.10 P40.35 P40.50
60 DAY FORWARD RATE P40.15 P40.40 P40.70
90 DAY FORWARD RATE P40.25 P40.45 P40.65
120 DAY FORWARD RATE P40.30 P40.50 P40.70

1. How mich is the FOREX gain or loss on December 31, 20x1? _______________ P1,500
2. How much is the Net FOREX gain or (loss) on March 1, 20x1? ________________P1,000

Problem 2. ABC Enterprise purchases inventory from a foreign supplier on September 1, 2023 with payment due
on December 31, 2023. The transaction will be settled in 1,000,000 foreign currency units (FCUs). Management
of ABC immediately enters into a forward contract to hedge this transaction. The relevant exchange rates and
forward contract fair values are as follows: (FORWARD CONTRACTS- HEDGING AN EXPOSED LIABILITY)
Date Spot Rate Nov 1 Forward Rate Forward Contract Fair
Value
Sept. 1 P1.120 P1.124 0
Nov. 1 P1.129 P1.128 4,000
Dec. 31 P1.140 P1.140 16,000

1. What is the amount of exchange gain or loss recognizzed with respect to the accounts payable account
on November 1, 2023? P9,000
2. What is the amount of exchange gain or loss recognized with respect to forward contract on December
31, 2023? P12,000
3. How much is the oustanding FC Receivable as of December 31, 2023? P1,140,000

Problem 3. On September 30, 2023, ABC ordered machinery from a Japanese firm. The purchase order is non-
cancelable. The purchase price is 5,000,000 yens with delivery and payment to be made on March 31, 2024. On
September 30, 2023, ABC entered into a forward contract to buy 5,000,000 yens on March 31, 2024. On March
31, 2024, the machinery was delivered.

9/30/2023 12/31/2023 3/31/2024

Spot rate 0.38 0.42 0.46
Forward rate 0.39 0.44

1. The March 31, 2024 profit or loss, foreign exchange gain or loss forward contract is __________.
P100.000
2. What is the firm commitment account balance as of September 30, 2023/ ____________ P0

Problem 4. Car Corp. (a Philippine based company) sold parts to a foreign customer on December 16, 20x4, with
payment of 10 million foreign currencies (FC) to be received on January 15, 20x5. The following exchange rates
applied:
Date Spot Rate Forward Rate to Jan. 15
December 16, 20x4 P 00090 P .00098
December 31, 20x4 .00092 .00093
January 15, 20x5 .00095 .00095

1. Assuming a forward contract was not entered into, what would be the net impact on Car Corp.'s 20x4
income statement related to this transaction?
(P1.47 x 600,000 FC) the original (60-day) forward rate on the date of hedging (i.e., November 30, 20x4)

2. Assuming a forward contract was entered into, what would be the net impact on Car Corp's 20x4 income
statement related to this transaction? Assume an annual interest rate of 12% and a fair value hedge. The
present value for one month at 12% is .9901.
since no forward contract was entered into, the only effect on income statement is only the foreign currency exchange gain
on exposed asset position.
Spot rate on the date of transaction: 12/16/20x4…………………………….P 0.00090
Balance Sheet date: Spot rate – December 31, 20x4………………………. 0.00092
Gain……………………………………………………………………………………P 0.00002
 Multiplied by: No. of FCs…………………………………………………………… 10 M
Foreign Currency Exchange Gain……………………………………………….P 200

3. Assuming a forward contract was entered into on December 16, what would be the net impact on Car
Corp.'s 20x5 income statement related to this transaction?
P695.05 increase
Hedged Item: Exposed Asset:
Spot rate on the date of transaction: 12/16/20x4…………………………….P 0.00090
Balance Sheet date: Spot rate – December 31, 20x4………………………. 0.00092
Gain……………………………………………………………………………………P 0.00002
Multiplied by: No. of FCs……………………………………………………………. 10 M
Foreign Currency Exchange Gain……………………………………………….P 200
Hedging Instrument:
Original forward rate on the date of hedging: 12/16/20x4…………………P 0.00098
Balance Sheet date: Remaining (current) forward rate – 12/31/20x4…… 0.00093
Gain…………………………………………………………………………………….P .00005
Multiplied by: No. of FCs……………………………………………………………. 0,000,000
FC Forward Contract Gain…………………………………………………………P 500
Multiplied by: PV of P 1 at 12%............……………………………………………. .9901
FC Forward Contract Gain…………………………………………………………P 495.50
Net impact on 20x4 income statement……………………………………… . P 695.05