Transaction Gains and Losses on Hedging a Purchase. Darby Refineries of Houston, Texas, purchased (2,000,000) barrels of

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Transaction Gains and Losses on Hedging a Purchase. Darby Refineries of Houston, Texas, purchased \(2,000,000\) barrels of oil from a company in Venezuela on November 15, 1998. Darby agreed to pay (in bolivars) B160,000,000 on January 14, 1999 ( 60 days later). To ensure that the dollar outlay for the purchase would not fluctuate, Darby negotiated a forward contract to buy B160,000,000 on January 14 at the forward rate of \(\$ 0.0565\).

Important dates and exchange rates for bolivars are: November 15: \(\$ 0.0533\); December 31: \$0.0530; January 14: \(\$ 0.0589\).

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1. Compute the dollars to be paid on November 15,1998 , to acquire \(B 160,000,000\) from the exchange dealer.

2. Compute the premium or discount on the forward contract.

3. Compute the total exchange gain or loss on the exposed liability and the hedge related to the oil purchase.

4. Did the hedging transaction minimize the effects of currency fluctuations? Explain.

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Managerial Accounting

ISBN: 9780538842822

9th Edition

Authors: Harold M. Sollenberger, Arnold Schneider, Lane K. Anderson

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