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Remeasurement_solution - becomes zero In this case the Boss...

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Solution : Remeasurement of foreign currency transactions Boss Corporation, a New Jersey based importer, acquired merchandise from a French supplier on November 21, 2010 for 60,000 francs. The debt was repaid on February 17, 2011. The following currency exchange rates are known: 11/21/10 1 franc = $0.29 02/17/11 1 franc = 0.31 Required : Compute Boss Corporation’s foreign currency gain or loss. November 21, 2010 Explanation Inventory 17,400 Accounts payable 17,400 (60,000 francs x $0.29) February 17, 2011 Accounts payable 17,400 Exchange loss 1,200 Cash 18,600 (60,000 francs x $0.31) Note: The Boss could enter into a forward contract today to buy francs at the settlement date at a fixed price. Hedging transactions are designed to deliberately offset foreign currency monetary asset or liability exposure. The foreign currency exchange risk
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Unformatted text preview: becomes zero. In this case the Boss Corporation has liability exposure (from the import purchase). Here is the basic problem: • Accounts payable denominated in a foreign currency. • Problem – uncertainty surrounding the U.S. dollars needed to buy the foreign currency to settle the obligation. • Solution – enter into a forward contract today (at the spot rate) to buy the foreign currency needed to settle the obligation. • The hedge creates an asset denominated in the foreign currency; which offsets the liability denominated in the foreign currency. Regardless of what happens to the exchange rate between the U.S. dollar and the foreign currency, the corporation has no foreign currency exposure. The will win on ½ of the transaction & loose on the other ½. The exchange rate gain and losses will cancel each other out....
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