Income Statement effect of transactions, committments & hedging
Income statement effect of transactions, commitments,& hedging. Clayton industries sells medical equipment worldwide. On Mar 1 of
the current year, the company sold equipment, with a cost of $160,000 to a foreign customer for 200,000 euros payable in 60 days. At the same time, the
company purchased a forward contract to sell 200,000 euros in 60 days. In another transaction, the company committed, on Mar 15, to deliver equipment
in May to a foreign customer in exchange for 300,000 euros payble in June. This equipment is anticipated to have a completed cost of $210,000. On Mar
15, the company hedged the commitment by acquiring a forward contract to sell 300,000 in 90 days. Changes in the value of the commitment are based on
changes in forward rates & all discounting is based on a 6% discount rate.
Various spot and forward rates for the euro are as follows:
Spot rate Forward rate fo 60 days from Mar 1 Forward rate for 90 days from Mar 15
Mar 1 $1.180 $1.181
Mar XXXXXXXXXX $ 1.179
Mar XXXXXXXXXX177
Apr XXXXXXXXXX
For individual months of Mar & Apr calculate the income statement effects of:
1. the foreign currency transaction
2. the hedge on the foreign currency transaction.
3. the foreign currency commitment.
4. the hedge on the foregin currency commitment.