Hedge of Net Investment in an International Subsidiary Price Smart, Inc. is a U.S. company that operates international membership shopping warehouse clubs. Its subsidiaries are located in 13 countries, including Panama, Guatemala, Jamaica, and Nicaragua, and one U.S. territory, the U.S. Virgin Islands. Suppose Price Smart hedges its net investment in its three Guatemalan subsidiaries. The quetzal is the Guatemalan currency.
Required
a. If the functional currency of the Guatemalan subsidiaries is the U.S. dollar,
1. What kinds of hedge investments are effective hedges of PriceSmart's foreign currency risk?
2. If the value of the quetzal, in U.S. dollars, increases from $0,125 to $0.15, will PriceSmart report a gain or a loss on the hedges?
3. Where in its financial statements will PriceSmart report gains and losses on hedges of its net investments?
b. If the functional currency of the Guatemalan subsidiaries is the quetzal,
1. What kinds of hedge investments are effective hedges of PriceSmart's foreign currency risk?
2. If the value of the quetzal, in U.S. dollars, increases from $0,125 to $0.15, will PriceSmart report a gain or a loss on the hedges?
3. Where in its financial statements will PriceSmart report gains and losses on hedges of its net investments?