Module $4$ Homework assignment:

On September $1,$ Year $1,$ ABC Company received an order to sell a machine to a customer in Canada at a

price of $100,000$ Canadian dollars. The machine was shipped and payment was received on March $1,$ Year $2.$

On September $1,$ Year $1,$ ABC Company purchased a put option giving it the right to sell $100,000$ Canadian

dollars on March $1,$ Year $2,$ at a price of $$75,000.$ ABC Company properly designates the option as a fair value

hedge of the Canadian$-$dollar firm commitment. The option cost $$1,700$ and had a fair value of $$2,800$ on

December $31,$ Year $1.$ The fair value of the firm commitment is measured through reference to changes in

the spot rate. ABC Company's incremental borrowing rate is $12$ percent. The present value factor for two

months at an annual interest rate of $12$ percent $(1$ percent per month$)$ is $0\mathrm{.}9803.$ The following spot

exchange rates apply:

Prepare journal entries for the option fair value hedge and the firm commitment and detail calculation for each journal entry and question.

$1-$What was the net impact on ABC Company's Year $1$ income as a result of this fair value hedge of a firm commitment?

$2-$What was the net impact on ABC Company's Year $2$ income as a result of this fair value hedge of a firm commitment?

$3-$What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk?Module $4$ Homework assignment:

On September $1,$ Year $1,$ ABC Company received an order to sell a machine to a customer in Canada at a price of $100,000$ Canadian dollars. The machine was shipped and payment was received on March $1,$ Year $2.$ On September $1,$ Year $1,$ ABC Company purchased a put option giving it the right to sell $100,000$ Canadian dollars on March $1,$ Year $2,$ at a price of $$75,000.$ ABC Company properly designates the option as a fair value hedge of the Canadian$-$dollar firm commitment. The option cost $$1,700$ and had a fair value of $$2,800$ on December $31,$ Year $1.$ The fair value of the firm commitment is measured through reference to changes in the spot rate. ABC Company$$s incremental borrowing rate is $12$ percent. The present value factor for two months at an annual interest rate of $12$ percent $(1$ percent per month$)$ is $0\mathrm{.}9803.$ The following spot exchange rates apply:

Date U$.$S$.$ Dollar per Canadian Dollar

September $1,$ Year $1$ $$0\mathrm{.}75$

December $31,$ Year $10\mathrm{.}73$

March $1,$ Year $20\mathrm{.}71$

Prepare journal entries for the option fair value hedge and the firm commitment and detail calculation for each journal entry and question.

$1-$What was the net impact on ABC Company$$s Year $1$ income as a result of this fair value hedge of a firm commitment?

$2-$What was the net impact on ABC Company$$s Year $2$ income as a result of this fair value hedge of a firm commitment?

$3-$What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk?