Jarvis Corporation transacts business with a number of foreign vendors and customers. These transactions are denominated in

Question:

Jarvis transacts business with a number of foreign vendors and customers. These transactions are denominated in FC, and the company uses a number of hedging strategies to reduce the exposure to risk. Several such transactions are as follows:
Transaction A: On November 30, the company purchased inventory from a vendor in the amount of 100,000 FC with payment due in 60 days. Also on November 30, the company purchased a forward contract to buy FC in 60 days.
Transaction B: On November 1, the company committed to provide services to a foreign customer in the amount of 100,000 FC. The services will be provided in 30 days. On November 1, the company also purchased a forward contract to sell 100,000 FC in 30 days. Changes in the value of the commitment are based on changes in forward rates.
Transaction C: On November 1, the company forecasted a purchase of equipment in 30 days. The forecasted cost is 100,000 FC, and the equipment is to be depreciated over five years using the straight-line method of depreciation. On November 1, the company acquired a forward contract to buy 100,000 FC in 30 days.
Transaction D: On November 30, the company purchased an option to sell 100,000 FC in 60 days to hedge a forecasted sale to a customer in 60 days. The option sold for a premium of $1,200 and had a of $1.155. The value of the option on December 31 was $2,000. The time value of all hedging instruments is excluded from the assessment of hedge effectiveness. Relevant spot and forward rates are as shown on page 594.

Jarvis Corporation transacts business with a number of foreign vendors

Required
Assuming that the company€™s year-end is December 31, for each of the above transactions determine the current-year effect on earnings. All necessary discounting should be determined by using a 6% discount rate. For transactions C and D, the time value of the hedging instrument is excluded from hedge effectiveness and is to be separately accounted for.

Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity. Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...