Foreign Currency Transactions and Hedging Activities
On October 1, 1999, the Keaton Company, a U.S. firm, sold merchandise to Chaplin, Inc., a British firm. The sales agreement specifies that Chaplin will make a payment of £500,000 to Keaton in 120 days on February 1, 1999. Relevant exchange rates are shown in the following table:
|
Date |
Rate |
$/£ |
|
October 1, 1999 |
Spot |
$1.50 |
|
30-day forward |
1.48 |
|
|
60-day forward |
1.46 |
|
|
90-day forward |
1.42 |
|
|
120-day forward |
1.40 |
|
|
December 31, 1999 |
Spot |
1.46 |
|
February 1, 2000 |
Spot |
1.51 |
Required
a. Determine the amount of the account receivable and sales revenue to be recorded (in U.S. dollars) by the Keaton Company on the date of sale.
b. What amount of gain or loss would be reported by Keaton in 1999 and in 2000 if the foreign currency receivable is not hedged?
c. Describe how Keaton might hedge the above transaction in the forward market for British pounds. What is the amount of income or expense associated with the hedging transaction?
d. In retrospect on February 1, 2000, would it have been wise for Keaton to hedge the account receivable? Explain.
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