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Requirements (a) Explain if a hedge exists; if so the type of hedge, hedging instrument and hedged item; if not why. (b) Record the journal entries on 31 December 2012 and 1 February 2013.

Requirements (a) Explain if a hedge exists; if so the type of hedge, hedging instrument and hedged item; if not why. (b) Record the journal entries on 31 December 2012 and 1 February 2013.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Company B management had a meeting on 1 October 2012 to discuss the capital expenditure budget for the year 2013. During the meeting, the management decided to purchase equipment for USD1 million on 1 February 2013. Functional currency is SGD. The equipment was delivered on 1 February 2013. In order to hedge the foreign exchange risk, company B entered into a foreign exchange forward contract on 1 October 2012 to buy USD1 million sell SGD with maturity date 1 February 2013. The USD/SGD spot rates and forward rates are as follows: USD/SGD spot USD/SGD forward points for maturity 1 February 2013 rates 1-Oct-12 1.23 -0.0003 31-Dec-12 1.22 -0.0001 1-Feb-13 1.23 Requirements (a) Explain if a hedge exists; if so the type of hedge, hedging instrument and hedged item; if not why. (b) Record the journal entries on 31 December 2012 and 1 February 2013.
Transcribed Image Text:Company B management had a meeting on 1 October 2012 to discuss the capital expenditure budget for the year 2013. During the meeting, the management decided to purchase equipment for USD1 million on 1 February 2013. Functional currency is SGD. The equipment was delivered on 1 February 2013. In order to hedge the foreign exchange risk, company B entered into a foreign exchange forward contract on 1 October 2012 to buy USD1 million sell SGD with maturity date 1 February 2013. The USD/SGD spot rates and forward rates are as follows: USD/SGD spot USD/SGD forward points for maturity 1 February 2013 rates 1-Oct-12 1.23 -0.0003 31-Dec-12 1.22 -0.0001 1-Feb-13 1.23 Requirements (a) Explain if a hedge exists; if so the type of hedge, hedging instrument and hedged item; if not why. (b) Record the journal entries on 31 December 2012 and 1 February 2013.
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