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EXERCISE 10 FA09

# EXERCISE 10 FA09 - EXERCISE 10-1 Balance sheet...

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EXERCISE 10-1 Balance sheet accounts—Debit (Credit): June 30 July 31 Inventory: Down payment (50,000 euros × \$1.350) .................. \$ 67,500 \$ 67,500 Balance due (400,000 euros × \$1.370) .................... 548,000 548,000 Total ................................................................... \$615,500 \$615,500 Accounts payable: (400,000 euros × \$1.370) ......................................... (548,000) Investment in option ....................................................... 2,600 Income statement accounts—Debit (Credit): Exchange loss: (400,000 × (\$1.381 – \$1.370) ................................... 4,400 (400,000 × (\$1.385 – \$1.381) ................................... 1,600 Gain on option: (\$2,600 – \$1,400) ..................................................... (1,200) (\$1.385 spot rate – \$1.375 strike price) × 400,000) minus previous value of \$2,600 .......................... (1,400) Note that the option has expired and, therefore, there is no time value. EXERCISE 10-2 (1) January 1, 20X5 \$0.125 = FC 1 Rate Spot Direct FC 8 = \$1 Rate Spot Indirect (2) U.S. Dollars Foreign Currency (FC) Value today ........................................... \$100 800 FC Interest rate ........................................... 4% 5% 180 days of interest ............................... 1.97260 19.72603 Value in 180 days .................................. \$101.97260 819.72603 FC 180-day forward rate = \$101.97260/819.72603 FC 1 FC = \$0.1244 Alternatively, using the formula method: Forward rate = 0.125 × 0.0246 + 1 0.0197 + 1 = 0.1244

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Exercise 10-2, Concluded (3) This suggests that the domestic (U.S.) interest rates are higher than those of the foreign country. Assume that one wants to buy foreign currency in the future; therefore, they retain and invest dollars until the future time arrives. The value of the invested dollars would be
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