Cash Sabrina wants to reduce Three Lion\'s net exposed position to zero under th

Question

Cash

Sabrina wants to reduce Three Lion's net exposed position to zero under theTemporal 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 asked this question yesterday and was given the answer to use CTA's which is used in the current method and not temporal method. I need the answer using the temporal method not the current rate method.

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 200

Explanation / Answer

Cash

Currency Translation Adjustment A/c comes up due the exchange rate difference to the different balance sheet aspects. This amount could be used to adjust the Exchange Rate Difference. These are free for adjustment to the non-physible items like goodwill, trade marks, etc.

Assets Value (In euros millions) Exchange Rate (Under Temporal Method ) ($/euro) Value (In $ millions) Liabilities & Net Worth Value (in Euros millions) Exchange Rate (Under Temporal Method ) ($/euro) 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 Adjustment A/c 0 0 15 - - - - Total 200 359 Total 200
359

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