On November 1, 20x1, Almira, Inc., a U.S.-based company, made its first foreign purchase when it acquired inventory from a vendor located outside of the U.S.

In conjunction with their inventory purchase rather than paying the vendor in U.S. dollars, Almira, Inc. agreed to pay for the purchase in the vendors local currency, which is designated as local currency units or LCUs.

With respect to the inventory purchase, Almira, Inc. agreed to pay 200,000 local currency units (LCU) to be made on February 1, 20x2.

The spot rates relevant to this transaction are:

Date	Exchange Rate
November 1, 20x1	$0.40 = 1 LCU
December 31, 20x1	$0.38 = 1 LCU
February 1, 20x2	$0.42 = 1 LCU

Required

Assuming the Almira pays for the inventory purchase on February 1, 20x2, as agreed:

A) Prepare Almiras journal entries relating to the inventory purchase for the following dates:

I. November 1, 20x1,

II. December 31, 20x1, and

III. February 1, 20x2.

B) Explain how Almira, Inc. could have hedged their foreign currency risk related to the foreign purchase using (no accounting journal entries are required):

I. Forward foreign currency exchange contracts and

ii. Foreign currency options.

In your explanation, discuss the type of forward exchange contract and foreign currency option they must enter into to hedge their foreign currency risk. Additionally:

iii. Discuss the basic difference between a forward exchange contract and a foreign currency option from the holders perspective.

C) For Almira, Inc.s foreign vendor, explain the type of foreign currency risk they accept relating to Almiras purchase, including the implications of appreciation or depreciation of the vendors currency relative to the U.S. dollar based on the transaction agreed to in the given information (no accounting journal entries required).

Please answer all parts of A, B, and C