Chase and Hedgeing

Chase Corporation, a U.S. enterprise, sold product to a customer in Japan on January 3, 2014 for ¥100,000,000 with payment required on February 4, 2014. Chase agreed to accept payment in Japanese Yen (¥) on that date. Relevant exchange rates to the Yen are:

Spot rate (¥1.00) Forward rate (to 02/04/14)

January 3, 2014 $0.007018 $0.007114

February 4, 2014 $0.007313

Required:

1. Assume that Chase did not hedge this transaction. Determine the amount of exchange gain or loss from foreign currency transactions that would be recognized in the 2014 income statements.

Value of sale at current rate on 1/3/2014 = 100,000,000 * $0.007018 = $701,800

Value of sale at actual rate on 2/4/2014 = 100,000,000 * $0.007313 = $731,300

Chase would have a gain of $29,500 on the sale if they did not hedge the transaction.

2. Assume Chase entered into a forward contract to hedge the foreign currency denominated accounts receivable and accounts for the hedge as a fair value hedge. Determine the net gain or loss from foreign currency transactions that would be recognized in the 2014 income statements.

Value of sale at current rate on 1/3/2014 = 100,000,000 * $0.007018 = $701,800

Value of sale at actual rate on 2/4/2014 = 100,000,000 * $0.007313 = $731,300

Value of sale at forward rate on 2/4/2014 = 100,000,000 * $0.007114 = $711,400

Chase would have a gain of $9600 on the sale if they hedge the reansaction

3. In hindsight, was Chase better off without hedging or with the hedging strategy?

Chase was better off without hedging as the transaction would have been worth $19,500 more:

$731,300 - $711,400 = $19,500

Home Products Corporation, a U.S. enterprise, purchased product from a Hungarian company on March 25 for HUF10,500,000 with payment required on May 31, 2014. Home Products agreed to make payment in Hungarian Forint on that date. Relevant exchange rates to the HUF are:

Spot rate (HUF1.00) Forward rate (to 05/31/14)

March...