Exchange Rates and Hedging

question 21

Essay

Exchange rates and hedging
On October 1 2011, Glenn Company accepted a shipment of beer from Germany. The purchase contract specifies payment of 3,000,000 euros is to be made on December 1, 2011. The exchange rate on October 1, 2011 was: $1 = 1.4 euros.
Instructions:
(a) If the exchange rate on December 1 2011 is: $1 = 1.18 Euros, what amount of gain or loss due to the exchange rate fluctuation will be recognized on the purchase?
(b) On October 1, Glenn's analysts were forecasting the exchange rate to be: $1 = 1.20 Euros on December 1, 2011. Glenn can enter into a hedging contract on October 1, 2011 whereby the bank would accept $2,480,000 in exchange for 3,000,000 Euros on December 1. The bank will charge a $2,000 fee to enter into the agreement. Should Glenn enter into the hedge agreement?
(c) If Glenn enters into the hedging contract, what will be the exchange gain/loss recorded on December 1, 2011?

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Definitions:

Direct Labour Hours

The number of hours worked directly on manufacturing a product or providing a service, used in costing and operational efficiency analysis.

Budgeted Balance Sheet

A financial statement that projects the financial position of a company at a future date, showing expected assets, liabilities, and equity balances.

Cash Number

A numerical value representing the amount of liquid assets or cash available to an entity at a specific point in time.

Cash Budget

A financial plan that estimates cash inflows and outflows over a specific period, usually used to assess liquidity.