Course Objectives:

Demonstrate the accounting treatment of issues involving foreign currency.

Demonstrate the effective use of accounting research tools.

The Case:

Dealeo Foods Inc. purchases vitamins from a supplier abroad. The invoices received by Dealeo are denominated in the foreign currency. Dealeo understands that fluctuations in foreign currency exchange rates may adversely affect the company's earnings. The CFO of Dealeo wants you to investigate derivative instruments and determine whether or not the use of a foreign currency forward contract or foreign currency options is best to hedge the company's exposure to foreign currency exchange risk.

Country:

Mexico

REQUIRED:

1.Examine the foreign currency exchange rate for the country during the most recent twelve month period. Make a graph of the exchange rate. NOTE: do not copy a graph; you should use Excel to create the graph.

2.Draft a memo to explain to the CFO the advantages and disadvantages of using a foreign currency forward contract and foreign currency options for hedging.Based on the history of the exchange rates (from above), how might these options impact Dealeo?

3.Make a recommendation on the hedging instrument that you believe the company should use.Justify/support your recommendation.

4.The busy CFO appreciates the documentation of your analysis, but also wants you to discuss your findings and recommendations.Assume you are called to his/her office and asked to explain your findings and recommendations.Explain a response.