QUESTION 3 Healthy Ltd, a New Zealand company, has purchased A$600,000 of products from Australia and it wishes to hedge the currency risk associated with this transaction. Healthy Ltd will pay in exactly two months' time. At the time of purchase, the spot rate of exchange is A$0.90, that is, NZ$1.00 buys A$0.90. Required For each of the following independent scenarios (a), (b), and (c), provide monthly journal entries and show all workings clearly. (a) Healthy Ltd decides not to hedge. The spot rate of exchange two months after the purchase (i.e., at settlement) is A$0.94. . Show the journal entry to record the purchase and any additional journal entries that are required through to (and including) settlement. Also Calculate the overall gain or loss from accounts payable. . (5 marks) (b) Healthy Ltd decides to hedge. The company enters into the forward agreement with the bank in which Healthy Ltd will buy A$600,000 and pay the bank agreed amount of NZ$ at settlement (i.e., two months after the purchase) at the agreed forward rate of A$0.88. The relevant spot rates and forward rates from the date of purchase to the settlement are shown in the table below. Complete WORKSHEET 1 on page 7, which forms part of your working: At the date of the purchase One month after the purchase Two months after the purchase (i.e., at settlement) Spot 0.90 0.92 0.94 Rates Forward 0.88 0.91 0.94 . Show the journal entry to record the purchase and any additional journal entries that are required through to (and including) settlement. Also Calculate the overall gain or loss from both the accounts payable and forward contract. . (8 marks) (c) Healthy Ltd decides to hedge. The company buys a call option that is, it buys the right to buy A$600,000 on a date two months from the purchase at an exercise price of A$0.88. The cost of the call is NZ$26,000. At the end of the first month, the call option has a fair value of NZ$14,000. Spot 0.90 0.92 0.94 Option value $26,000 $14,000 At the date of the purchase One month after the purchase Two months after the purchase (i.e., at settlement) Question 3 (c) continued: Show the journal entry to record the purchase and any additional journal entries that are required through to (and including) settlement. Also Calculate the overall gain or loss from both the accounts payable and option contract. . (6 marks) (d) Comparing part (b) and part (c) above, explain the two main differences between Forward contract and option contract. [word limit: 90 words) (2 marks) (Total for question: 21 marks) WORKSHEET 1 FORMS PART OF THE ANSWER FOR QUESTION 3 (REMEMBER TO ATTACH THIS WORKSHEET TO YOUR ANSWER) Date Forward Fair Value Change Forward Contract Asset and Liability (Contract amount A$600,000) Rate Net (A-L) of Forward NZ$ Value of Asset in Fair Value NZ$ Value of Liability Date of Contract 1 month after purchase Settlement date