Reference no: EM132979987

Question - Pine Ridge Corporation (USA) believed that the outlook for the Danish Krone was not good and the krone would drop from its present value of $.1800 to $.1600 by year end. Pine Ridge's finance staff was thus more pessimistic than the market as whole, since the current one-year forward quote for the krone was $.1700. pine Ridge's translation exposure in krone on January 1 was DKK30,000,000 and the finance staff decided to hedge this exposure by selling kroners forward. Reasoning that profit on the transaction would be taxable at 46%, it sold forward (DKK30, 000,000/.54 = DKK55, 555,555). It expected the after gain to exactly, offset the nondeductible loss from translation. By selling DKK55, 555,555 forward one year, Pine ridge obligated itself to deliver DKK55, 555,555 at that time and to receive $9,444,444.

a. Did Pine Ridge achieve a perfect hedge, given its forecast of the krone of $0.1600 was correct. Explain and show your calculations.

b. If your answer to part (a) is no, explain and calculate what Pine Ridge should have done to achieve a perfect hedge, given the forecast value of the krone of $0.1600 was correct.

c. When Pine Ridge closed its books on December 31, one year later, the spot krone was $0.1850. Calculate Pine Ridge translation gain or loss and after-tax gain or loss on forward contract transaction.