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    Accounting 106 Quiz On Forwards, Futures and Options

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    Lee Suarez
    The document contains two problems related to accounting for forwards, futures, and options. Problem 1 involves a company that entered into forward currency contracts to hedge foreign exchange risk on the purchase of machinery from South Korea. Problem 2 involves a company that purchased a call option to hedge the price risk of raw materials, where the option can be exercised if the market price is above the strike price.

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    Accounting 106 Quiz On Forwards, Futures and Options

    Uploaded by

    Lee Suarez
    74 views1 page
    The document contains two problems related to accounting for forwards, futures, and options. Problem 1 involves a company that entered into forward currency contracts to hedge foreign exchange risk on the purchase of machinery from South Korea. Problem 2 involves a company that purchased a call option to hedge the price risk of raw materials, where the option can be exercised if the market price is above the strike price.

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    Seatwork on FFO

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    The document contains two problems related to accounting for forwards, futures, and options. Problem 1 involves a company that entered into forward currency contracts to hedge foreign exchange risk on the purchase of machinery from South Korea. Problem 2 involves a company that purchased a call option to hedge the price risk of raw materials, where the option can be exercised if the market price is above the strike price.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    74 views1 page

    Accounting 106 Quiz On Forwards, Futures and Options

    Uploaded by

    Lee Suarez
    The document contains two problems related to accounting for forwards, futures, and options. Problem 1 involves a company that entered into forward currency contracts to hedge foreign exchange risk on the purchase of machinery from South Korea. Problem 2 involves a company that purchased a call option to hedge the price risk of raw materials, where the option can be exercised if the market price is above the strike price.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 1

    Accounting 106

    Quiz on Forwards, Futures and Options

    Problem 1

    Hyung company has Philippine peso as the functional currency. On September 1, 2017, the entity
    expects to purchase a machinery from Sourth Korea for 3,000,000 won on July 1, 2018. Accordingly
    the entity is exposed to foreign currency risk.

    On September 1, 2017, the entity also entered into a forward currency contract with a speculator bank
    to purchase the machinery at 3,000,000 won for a fixed amount of P465,000 or P1 to 0.155 korean
    won on July 1, 2018.

    The forward currency contract is designated as cash flow hedge of the entity’s exposure to increase
    in dollar exchange rate.

    On July 1, 2018, the entity purchased on account the machinery for 3,000,000 won when the
    exchange rate was P1 to 0.148 won. The machinery is payable on January 31, 2019 for 3,000,000
    won.

    To protect itself from foreign currency risk, the entity entered into another foreign currency contract
    with a speculator bank for a fixed payment of P444,000 or a rate of P1 to 0.148 won. This forward
    contract is designated to be fair value hedge.

    The pertinent exchange rates are as follows:

    September 1, 2017 0.155


    December 31, 2017 0.151
    July 1, 2018 0.148
    December 31, 2018 0.153
    January 31, 2019 0.157

    Required:

    Prepare pertinent journal entries for 2017, 2018 and 2019.

    Problem 2

    Bitter Company produces authentic cotton blazers and the Company needs 85,000 kilos of raw
    materials in the production process. On December 1, 2019, the entity purchased a call option as a
    cash value hedge to 75,000 kilos on February 1, 2020. The option strike price is P120 per kilo. The
    entity paid P85,000 for the call option. This derivate contract means that if the market price is higher
    than P120, the Company can exercise the option and buy the asset at the strike price of P120. If the
    market price is lower than P120, the Company can throw away the option and buy the asset at the
    cheaper price. The market price and the time value of option are as follows:

    Time value
      of option
    December 31, 2019 46,000
    February 1, 2020 8,000

    a. The market price of the product is P126 and P133 on December 31, 2019 and February 1, 2020,
    respectively.
    b. The market price of the product is P123 and P117 on December 31, 2019 and February 1, 2020,
    respectively.

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