Chapter 9_Class Notes

Chapter 9_Class Notes - Foreign Currency 1,340,000 2...

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1. Accounting journal entries when put option is out of money (spot rate is higher than the strike price for a put option) Please refer page 398 for the section “Option Designated as Fair Value Hedge” Suppose on 3/1/2012, the stop rate is $1.34 = 1 Euro instead of $1.30 = 1 Euro as shown in the example. Then the option is out of money, meaning that there is no value for the put option (fair value is 0). The journal entries on 3/1/2012 are following: Accounts Receivable 10,000 Foreign Exchange Gain 10,000 (to account for the increase in fair value of accounts receivable) Loss on Foreign Currency Option 6,000 Foreign Currency Option 6,000 (to adjust the foreign currency option to fair value of 0) Foreign Currency 1,340,000 Accounts Receivable 1,340,000 Cash 1,340,000
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Unformatted text preview: Foreign Currency 1,340,000 2. Amortization of Option Expenses Refer to the example on page 396 in the section “Option Designated as Cash Flow Hedge” If you read the text book carefully, you can see that the option expenses are calculated based on the change in time value of the option (see the table on the top of the page 396). You can simply the calculation of option expenses by using straight line method: in this example, total option is $9,000 over three months, so each month, the option expense is $3,000. In this example, the amount of option expense happens to be exactly the same under both the change in time value method (as shown in the book example) or under the straight line method. Hope this is clear....
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