ACC5116
FOREX, DERIVATIVES & HEDGING
Hedging an Exposed Asset or Liability--- Fair Value Hedge---P&L ---Designated Hedge
3. Anton Corp. is engaged in a retail business. The company buys its merchandise from foreign
suppliers and ships its goods overseas to target customers outside their country.
On September 1, 2021 an overseas customer called up and placed an order for certain merchandise
worth $95,000 and on the same date, the company also ordered additional merchandise from its foreign
supplier worth $55,000.
On September 30, 2021, the invoice is billed to the customer and due on December 31, 2021. The
merchandise from foreign supplier was shipped on October 31, 2021 and was due on November 30,
2021.
To hedge the possible fluctuations in the exchange rate, the entity entered into a forward contract to
sell $95,000 on September 30, 2021 for delivery on December 31, 2021 and also entered into a forward
contract to buy $55,000 on October 31, 2021 for delivery on November 30, 2021. The relevant
exchange rates were as follows:
Date 09/01/21 09/30/21 10/31/21 11/30/21 12/31/21
Selling spot rate 34.55 34.40 36.34 36.50 32.88
Buying spot rate 35.33 35.67 35.45 35.23 34.50
90-day forward rate 36.23 35.12 35.22 36.43 35.90
60-day forward rate 34.78 34.89 36.76 35.68 35.97
30-day forward rate 36.78 38.55 35.43 36.53 37.77
10/31 Importing Transaction --- (Purchase of merchandise ; foreign currency denominated AP)
Purchases 1,998,700
Accounts Payable 1,998,700 ($55,000 x P36.34)
10/31 Forward Contract to buy foreign currency from a bank
Gross Position Approach
Forward Contract Receivable ($) 1,948,650 ($55,000 x P35.43 current forward rate)
Forward Contract Payable (Pesos) 1,948,650 (contracted forward rate P35.43)
Net Position Approach
-Memo Entry- Forward Contract has no fair value on the inception date
11/30 Forward Contract as the hedging instrument
Gross Position Approach
Forward Contract Payable 1,948,650
Cash (Pesos) 1,948,650
Foreign Currency/Cash ($) 2,007,500 ($55,000 x P36.50)
Forward Contract Receivable 1,948,650
Gain on Forward Contract 58,850
Net Position Approach
Foreign Currency/Cash ($) 2,007,500
Cash (Pesos) 1,948,650
Gain on Forward Contract 58,850
11/30 Importing Transaction (Accounts Payable is the hedged item)
Accounts Payable 1,998,700
FOREX loss 8,800
Foreign Currency 2,007,500
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9/30 --- Exporting Transaction (Sale of merchandise ; foreign currency denominated AR)
Accounts Receivable 3,388,650 ($95,000 x P35.67)
Sales 3,388,650
9/30--- Forward Contract to sell foreign currency to a bank
Gross Position Approach
Forward Contract Receivable (Pesos) 3,336,400 ($95,000 x P35.12 --contracted forward rate)
Forward Contract Payable ($) 3,336,400 (P35.12--current forward rate)
Net Position Approach
Memo Entry----A forward contract has NO Fair value on the inception date
10/31 ---Exporting transaction to sell merchandise on account (FC denominated)
FOREX loss 20,900 (on the hedged item---AR)
Accounts Receivable 20,900
10/31 ---Forward Contract to sell FCUs to the bank
Gross Position Approach
Loss on Forward Contract 155,800
Forward Contract Payable 155,800
Net Position Approach
Loss on Forward Contract 155,800
Forward Contract 155,800
11/30 ---- Exporting Transaction
FOREX Loss 20,900
Accounts Receivable 20,900
11/30 --- Forward Contract
Gross Position Approach
Forward Contract Payable 21, 850
Gain on Forward Contract 21,850
Net Position Approach
Forward Contract 21,850
Gain on Forward Contract 21, 850
12/31 Exporting Transaction (Hedged Item)
Foreign Currency /Cash 3,277,500
FOREX loss 69,350
Accounts Receivable 3,346,850
12/31 Forward Contract (Hedging Instrument)
Gross Position Approach
Cash (Pesos) 3,336,400
Forward Contract Receivable 3,336,400
Forward Contract Payable 3,470,350
Foreign Currency (Dollars) 3,277,500
Gain on Forward Contract 192,850
Net Position Approach
Cash (Pesos) 3,336,400
Forward Contract 133,950
Foreign Currency ($) 3,277,500
Gain on forward contract 192,850
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1. What is the amount of sales revenue recognized for the year ended 2021?
a. 3,356,350
b. 3,268,000
c. 3,388,650
d. 3,282,250
2. What is the forex gain or loss due to hedging instrument pertaining to the export
transaction for the month of November 30, 2021?
a. 21,850 loss
b. 21,850 gain
c. 133,950 loss
d. 133,950 gain
3. What is the net forex gain or loss for the year 2021 due to the hedging activity?
a. 2,200 net loss
b. 2,200 net gain
c. 37,150 net loss
d. 37,150 net gain
Hedging an Unrecognized Firm Commitment under a Fair Value Hedge
4. On November 2, 2021, P Corp entered into a firm commitment with a Japanese firm to acquire
equipment, delivery and passage of title on March 31, 2022, at a price of 4,375 yen. On the same
date, to hedge against unfavorable changes in the exchange rate of the yen, P Corp. entered into a
150 day forward contract with BPI for 4,375 yen. The relevant exchange rates were as follows:
11/2/2021 12/31/2021 3/31/2022
Spot Rate P37 P38 P35
Forward Rate P40 P33 P35
***Fair Value Hedge
11/ 2 Forward Contract to buy foreign currencies
Gross Position Approach
Forward Contract Receivable (Yen) 175,000
Forward Contract Payable (Pesos) 175,000
Net Position Approach
-Memo Entry-
11/2 Firm Commitment to purchase equipment
-Memo Entry-
12/ 31 Forward Contract to buy foreign currencies
Gross Position Approach
Loss on Forward Contract 30,625
Forward Contract Receivable 30,625
Net Position Approach
Loss on Forward Contract 30,625
Forward Contract 30,625
12/31 Firm Commitment to purchase equipment
Firm Commitment 30,625
Gain on Firm Commitment 30,625
3/31 Forward contract to buy foreign currencies
Gross Position Approach
Forward Contract Payable 175,000
Cash (Pesos) 175,000
Cash (FC) 153,125
Forward Contract Receivable 144,375
Gain on Forward Contract 8,750
Net Position Approach
Cash (Yen) 153,125
Forward Contract 30,625
Cash (Pesos) 175,000
Gain on Forward Contract 8,750
3/31 Firm Commitment to purchase equipment
Loss on Firm Commitment 8,750
Firm Commitment 8,750
Equipment 175,000
Firm Commitment 21,875
Cash (Yen) 153,125
1. What is the foreign currency gain/(loss) due to the change in the fair value of the
underlying purchase commitment on December 31, 2021?
a. 30,625 gain
b. 30,625 loss
c. 4,375 gain
d. 4,375 loss
2. What is the amount debited to the equipment account?
a. 161,875 on 11/2/2021
b. 175,000 on 11/2/2021
c. 153,125 on 3/31/2022
d. 175,000 on 3/31/2022
5. On November 1, 2021, 7D Co. entered into a firm commitment with Toki-Toki Japanese Company
for the export of dried mangoes with a contract price of 10,000 Yen. The goods will be delivered by
7D Co. on January 30, 2022. On the same day, in order to protect itself from the risk of changes in
fair value of the firm commitment due to changes in underlying foreign currency, 7D Co. entered
into a forward contract with BDO for the sale of 10,000 Yen at the forward rate on November 1,
2021. IAS 39 provides that the hedge of the foreign currency risk of a firm commitment may be
accounted for as either fair value hedge or cash flow hedge. 7D Co. elected to account for the
hedge of the firm commitment using fair value hedge. The following direct exchange rates are
provided:
November 1, 2021 December 31, 2021 January 31, 2022
Buying spot rate P10 P13 P12
Selling spot rate P13 P15 P16
Forward buying 90-days P11 P14 P15
Forward selling 90-days P13 P16 P17
Forward buying 60-days P14 P17 P16
Forward selling 60-days P15 P18 P14
Forward buying 30-days P11 P15 P12
Forward selling 30-days P13 P11 P14
1. What is the foreign currency gain/(loss) due to hedged item for the year ended December
31, 2021?
a. 40,000 gain
b. 20,000 loss
c. 30,000 gain
d. 10,000 loss
2. What is the foreign currency gain/(loss) due to hedging instrument for the year ended
December 31, 2022?
a. 50,000 loss
b. 30,000 gain
c. 20,000 gain
d. 20,000 loss
Hedging an Exposed Liability Position under a Fair Value Hedge
6. On November 1, 2021, Hublot Co. acquired and took delivery from an Australian manufacturer of
inventory costing $34,500 AUD. Payment is due on February 28, 2022. On the same date, the
company paid P32,800 to acquire an option contract for $34,500 AUD and the option price was
P34.80. option price ; exercise price ; strike price ; contracted price
Nov. 1 Nov. 30 Dec. 31 Jan. 31 Feb. 28
Market price 32.90 35.40 37.51 38.12 38.20
FMV Option ? 33,500 94,900 115,600 ?
Call Option (option to buy)
In the Money spot > strike
At the Money spot = strike
Out of the Money spot < strike
Put Option (option to sell)
In the Money spot < strike
At the Money spot = strike
Out of the Money spot > strike
11/1 11/30 12/31 1/31 2/28
FV of call option P32,800 P33,500 P94,900 P115,600 P117,300
Intrinsic value 0 20700 93,495 114,540 117,300
Time value 32,800 12,800 1,405 1,060 0
Hedging Instrument Entries:
11/1
Investment in Call option 32,800
Cash 32,800
11/30
Investment in Call option 700
Gain on Call Option 700
12/31
Investment in Call Option 61,400
Gain on Call Option 61,400
1/31
Investment in Call Option 20,700
Gain on Call Option 20,700
2/28
Investment in Call Option 1,700
Gain on Call Option 1,700
1. What is the forex gain or loss in the hedging instrument due to change in the effective
portion on November 30, 2021, if changes in the time value will be excluded from the
assessment of hedge effectiveness? (split accounting)
a. 86,250 loss
b. 72,795 gain
c. 20,700 gain
d. 700 gain
2. What is the forex gain or loss in the hedging instrument due to change in the ineffective
portion for the year 2022, if changes in the time value will be excluded from the
assessment of hedge effectiveness? (split accounting)
a. 1,060 loss
b. 1,405 loss
c. 345 loss
d. 12,800 loss
3. If changes in the time value will be included in the assessment of hedge effectiveness, what
is the forex gain (loss) in the hedging instrument for the year 2021? (non-split accounting)
a. 62,100 gain
b. 61,400 gain
c. 82,800 gain
d. 94,900 gain
4. How much is the net forex gain or loss as a result of the hedging activity on January 31,
2022?
a. 41,745 net gain
b. 0
c. 345 net loss
d. 97,290 net loss
7. On September 1, 2021, 2B Co. anticipated the purchase of merchandise from a foreign vendor at a
price of $1,000. The purchase would probably occur on January 30, 2022. On October 1, 2021, 2B
Co. forecasted the sale of merchandise to a foreign customer at a price of $3,000. The sale would
probably occur on March 31, 2022.
On September 1, 2021, 2B Co. purchased a 150-day call option to buy $1,000 at an option price of
P20 by paying option premium of P200. On October 1, 2021, 2B Co. purchased a 180-day put
option to sell $3,000 at a strike price of P24 by paying option premium of P300.The company
prepares calendar year financial statements.
The forecasted purchase and sales transaction occurred on the date anticipated. For the year ended
December 31, 2022, all foreign currency receivables are collected but only 80% of purchased
inventories from the foreign vendor were sold to third person.
The following additional data are provided:
9/1/2021 10/1/2021 12/31/2021 1/31/2022 3/31/2022
Buying spot rate P23 P24 P21 P22.50 P22
Selling spot rate P20 P21 P24 P23 P21
Fair value of put option ? ? P10,000 ? ?
Fair value of call option ? ? P4,500 ? ?
1. What is the net foreign currency gain or loss in Other Comprehensive Income of
Statement of Comprehensive Income for the year ended December 31, 2021?
a. 13,000 net gain
b. 1,000 net gain
c. 14,000 net gain
d. 2,800 net gain
2. What is the net foreign currency gain or loss in Other Comprehensive Income of
Statement of Comprehensive Income for the year ended December 31, 2022?
a. 4,000 net loss
b. 1,500 net loss
c. 5,500 net loss
d. 5,700 net loss
3. What is the net cumulative Other Comprehensive Income on December 31, 2022?
a. 600 cumulative credit
b. 6,600 cumulative credit
c. 2,400 cumulative credit
d. 9,000 cumulative credit
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