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How do I go about structuring a fair valuehedge using a FX option? how do I know when it selling or purchasing an option and
How do I go about structuring a fair valuehedge using a FX option? how do I know when it selling or purchasing an option and if its an option to purchaseor sell euros OR purchaseor sell US?
Also how do I know this is an effective fair value hedge
ABC company a manufacturer of auto parts is a US company with branch operations in Germany. On December 31, 2015 ABC wishes to use a foreign currency option to hedge a 10,000,000 euro denominated accounts receivable that is due in two years. ABC wishes to use fair value hedge accounting. Over the subsequent 4 quarters the following are the changes in the fair value of the receivable and the fair value of the foreign currency option hedge. Quarter ended March 31, 2016: Euro receivable increases by $400,000 Option hedge declines by $350,000 Quarter ended June 30, 2016: Euro receivable decreases by $500,000 Option hedge increases by $ 400,000 Quarter ended Sept. 30, 2016: Euro receivable decreases by $800,000 Option hedge increases by $700,000 Quarter ended Dec. 31, 2016: Euro receivable increases by $ 200,000 Option hedge decreases by $ 100,000 Answer the following questions: 1. Structure an appropriate fair value hedge using an FX option. Your answer must state the date of the hedge, whether ABC is purchasing or selling an option, what is the maturity date of the option as well as whether it is an option to purchase euros and sell US dollars or an option to purchase US dollars and sell euros. 2. Identify by codification reference, e.g., xxx-xx-xx-xx, and attach AND HIGHLIGHT the appropriate section(s) of the FASB codification that describe the alternate criteria that can be used to determine at December 31, 2015 whether or not this has been an effective fair value hedge. 3. Using one of the alternate criteria in your answer to #2 above, state your conclusion as to whether this is an effective hedge, meeting the FASB criteriaStep by Step Solution
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