Fineas Fashions, a U.S. company, buys merchandise from suppliers in France, and
ID: 2500960 • Letter: F
Question
Fineas Fashions, a U.S. company, buys merchandise from suppliers in France, and pays the suppliers in euros. Fineas Fashions has a June 30th year end. Exchange rates are as follows:
Date
Spot rate ($/€)
Forward rate - August 15 delivery
March 1, 2015
$1.34
$1.36
June 30, 2015
$1.41
$1.43
August 15, 2015
$1.44
$1.44
August 31, 2015
$1.48
-------
On March 1, 2015, Fineas makes inventory purchases of €1,000,000, and enters into a forward purchase for delivery of €1,000,000 on August 15, 2015, to hedge its foreign currency risk. Fineas pays its suppliers on August 15, 2015, and sells the merchandise to U.S. customers on August 31, 2015.
Calculate the following balances:
1. June 30, 2015 accounts payable _______________
2. June 30, 2015 Investment in forward contract _______________
3. 2015 exchange gain (loss) on accounts payable _______________
4. 2015 exchange gain (loss) on forward contract _______________
5. 2016 exchange gain (loss) on accounts payable _______________
6. 2016 exchange gain (loss) on forward contract
Date
Spot rate ($/€)
Forward rate - August 15 delivery
March 1, 2015
$1.34
$1.36
June 30, 2015
$1.41
$1.43
August 15, 2015
$1.44
$1.44
August 31, 2015
$1.48
-------
Explanation / Answer
1. June 30, 2015 accounts payable €1,000,000 * $1.41 = $1410000
2. June 30, 2015 Investment in forward contract €1,000,000 * $1.36 = $1360000
3. 2015 exchange loss on accounts payable €1,000,000 ( $1.48 - $1.34) = $140000
4. 2015 exchange gain (loss) on forward contract €1,000,000 ($1.44 - $1.36) = $80000
5. 2016 exchange loss on accounts payable $140000
6. 2016 exchange loss on forward contract $80000
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