Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Exercise 5 ( LO 3 , 6 ) Hedging a commitment with an option. Wellington Manufactur - ing manufactures industrial ovens used primarily in the
Exercise LO Hedging a commitment with an option. Wellington Manufactur
ing manufactures industrial ovens used primarily in the process of coating or painting metals.
The ovens are sold throughout the world, and units are manufactured to customers' specifica
tions. On June the company committed to sell two ovens to a major transnational custo
mer. One of the ovens has a selling price of $ and is to be paid for with foreign
currency A FCA The other unit has a selling price of $ and is to be paid for with for
eign currency Both units were shipped, FOB shipping point, on September and
payment is due within days of shipment. In order to hedge against exchange rate risks, Well
ington acquired two put options on June with notional amounts equal to the respective for
eign currency selling prices. The options expire on October and customer remittances are
also received on October Relevant information concerning the options and exchange rates
is as shown:
Assuming that the time value of the options is excluded from the determination of hedge
effectiveness, determine the gain or loss to be recognized on each of the commitments. The
firm commitment is measured based on changes in the spot rate over time.
Assuming that the costs of the FCA unit and the FCB unit are $ and $
respectively, calculate the gross profit margin on each of the units that would have been
experienced with and without the hedge.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started