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Tax Hedging Exercises Essay

833 words - 4 pages


FA06 Hedging: Exercises

Exercise 1 – Hedging of an exposed receivable with a forward contract (no hedge
Canuck Co., a Canadian public company, received an order for hockey sticks on October 1,
2013. Canuck sold hockey sticks to Eagle Co. for US $100,000 on November 1, 2013, with
payment to be received on February 1, 2014. On November 1, Canuck Co. entered into a
contract to deliver US $100,000 in exchange for Canadian dollars on February 1, 2014.
Canuck has a December 31 year-end.
Relevant exchange rates were as follows:
October 1, 2013
November 1, 2013
December 31, 2013
February 1, 2014

Spot Rate
1.00 USD = 0.98 CAD
1.00 ...view middle of the document...

(Minaker) is a Canadian public company with a December 31 year-end. Minaker
often purchases inventory from suppliers in foreign countries. On November 15, Year 1, it
placed an inventory order at a cost of 250,000 FCU with one of its foreign suppliers. The
inventory was to be delivered on January 15, Year 2, and payment was due February 15, Year
2. Management of Minaker became increasingly worried about adverse changes in the
exchange rate; as a consequence, on December 1, Year 1, it entered into a forward contract to
purchase 250,000 FCU forward on February 15, Year 2. The inventory was delivered as
scheduled, on January 15, Year 2.
Relevant exchange rates were as follows:
Spot Rates:
December 1, Year 1
December 31, Year 1
January 15, Year 2
February 15, Year 2

1.00 FCU = 1.23 CAD
1.00 FCU = 1.25 CAD
1.00 FCU = 1.29 CAD
1.00 FCU = 1.33 CAD

Forward Rates:
December 1, Year 1
December 31, Year 1
January 15, Year 2

1.00 FCU = 1.26 CAD
1.00 FCU = 1.28 CAD
1.00 FCU = 1.31 CAD

1. Prepare journal entries to account for all transactions noted above. Assume the forward
contract has been identified as a hedge of the purchase of inventory.
2. Use a direct calculation to determine the cost of hedging the payable, and indicate
whether it is a foreign exchange gain or a loss.


FA06 Hedging: Exercises...

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