Accounts Receivable and Payable
In each of the following cases, determine the amount of gain or loss to be reported in 1999 due to unhedged accounts receivable or payable that are denominated in foreign currencies. All exchange rates are stated as the number of U.S. dollars required to obtain one unit of foreign currency.
a. Asebrook Company recorded an account receivable of 10,000 British pounds in 1999 when the exchange rate was $1.50. At year-end, the exchange rate had risen to $1.60.
b. Baker Company recorded an account payable of 1,000,000 New Taiwan dollars in 1999 when the exchange rate was $0.04.At year-end, the exchange rate had risen to $0.05.
c. Hanno Company recorded an account receivable of 100,000 Canadian dollars in 1999 when the exchange rate was $0.75.At year-end, the exchange rate had fallen to $0.68.
d. Pfeiffer Company recorded an account payable of 50,000 Swiss francs in 1999 when the exchange rate was $0.60.At year-end, the exchange rate had fallen to $0.57.
e. In each of these cases (a through d), describe how the U.S. firm might have insulated itself from foreign exchange gains and losses by transactions in the foreign exchange forward market.
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