Cash Sabrina wants to reduce Three Lion\'s net exposed position to zero under th
ID: 2717501 • Letter: C
Question
Cash
Sabrina wants to reduce Three Lion's net exposed position to zero under the Temporal Method. Discuss one balance sheet hedge strategy you would reccomend using the new exchange rate $1.8/ euros from $1.5/ euros. Demonstrate with your strategy the additional amount of translation gain/ loss will be zero as compared to the previous exchange rate $1.5/euros.
I don't need the calculations for the translations, but more of the strategy and explanation on how it will reduce the net exposed position to zero.
Assets Value (In euros millions) Liabilities & Net Worth Value (in Euros millions)Cash
30 Accounts Payable 50 Accounts Receivable 20 Long-Term Debt 40 Inventory 50 Common Stock 90 Net Plant & Equipment 100 Retained Earnings 20 Total 200 Total 200Explanation / Answer
As per question, Sabrina wants to reduce Three Lion's net exposed position to zero under the Temporal Method. The Balance Sheet hedge strategy you would reccomend using the new exchange rate $1.8/ euros from $1.5/ euros:
Cash
The additional amount of translation gain/ loss will be treated as "Currency Translation Adjustments" (CTAs).
This CTAs will be available for (1) can be treated as Foreign exchange gain and booked as profit in the coming year.
(2) This CTAs can be adjusted to the Goodwill or other non-physible assets.
(3) These CTAs will also be available to be adjusted towards any loss towards any exchange rate.
Assets Value (In euros millions) Exchange Rate to $ Value (In $ millions) Liabilities & Net Worth Value (in Euros millions) Exchange Rate to $ Value (In $ millions)Cash
30 1.8 54 Accounts Payable 50 1.8 90 Accounts Receivable 20 1.8 36 Long-Term Debt 40 1.8 72 Inventory 50 1.64 82 Common Stock 90 1.8 162 Net Plant & Equipment 100 1.72 172 Retained Earnings 20 1.75 35 currency translation adjustments (CTAs) 0 0 15 Total 200 359 Total 200 359Related Questions
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