Does hedge accounting apply in given situation

Assignment Help Finance Basics
Reference no: EM131792745

Question: Call Options Hedging Foreign Currency Debt. Taking advantage of lower interest rates in the United Kingdom, Carlton Inc., a U.S. firm, borrowed £2,000,000 on July 1, 2016, to be repaid in one year.

When the transaction occurred, the exchange rate was $1.50/£. To hedge against possible appreciation of the British pound, Carlton paid a premium of $0.014/£ for July 2017 call options on £2,000,000, with a strike price of $1.49/£. On December 31, 2016, when Carlton's books are closed, the exchange rate is $1.55/£, and the calls are selling for $0.069/£. On June 30, 2017, Carlton sells the calls for $0.12/£. The exchange rate at that time is $1.61/£.

Required: a. Does hedge accounting apply in this situation? Explain.

b. Prepare Carlton's journal entries made on July 1, 2016, December 31, 2016, and June 30, 2017, to recognize the calls' value changes and the exchange rate adjustments on the debt. Ignore interest on and repayment of the debt.

Reference no: EM131792745

Questions Cloud

What price should the investor offer : On the basis of this agreement, what price should the investor offer? A normal return on the fair value of net assets in this industry is 15 percent
Discuss the different approaches to damage calculations : Commercial Damages As the textbook authors point out, calculating commercial damages takes creative analysis as well as a step-by-step scientific approach.
Determine coastal''s total revenue and profit functions : What profit-maximizing price per soda should Coastal charge, how many sodas per day would it expect to sell at this price, and what would be the daily profits?
Compute the gain or loss on the disposal : Mathews Bus Service traded in a used bus for a new one. Compute the gain or loss on the disposal for financial reporting purposes
Does hedge accounting apply in given situation : Call Options Hedging Foreign Currency Debt. Taking advantage of lower interest rates in the United Kingdom, Carlton Inc., a U.S. firm, borrowed £2,000,000.
What is the restated value of the building purchased : Current Year Consumer Price Index 200: Using general price level accounting, in Year 22, what is the restated value of the building purchased in Year 10
Lien typically must be filed within what period of time : The notice of lien typically must be filed within what period of time?
Concrete strength and workability with marble powder wests : Aim of the project is based on an experiment set up that is based on compering C35 Concrete strength & workability with different percentage of Marble powder
What are the total monthly revenues costs : If Sand Dollar Art's monthly cost function is C(x) = 400 + 100x - x2 find the profit-maximizing monthly quantity. What are the total monthly revenues.

Reviews

Write a Review

Finance Basics Questions & Answers

  What trades must the investor make now in order to return

What trades must the investor make now in order to return to an equally-weighted portfolio?

  Assume that machine prices are not expected to rise because

the perez company has the opportunity to invest in one of two mutually exclusive machines which will produce a product

  Obtain a loan from a bank by signing a note

The following transactions occur for Cardinal Music Academy during the month of October: Provide music lessons to students for $12,000 cash.

  Dividends are expected to grow at a 80 percent annual rate

stock in dragula industries has a beta of 1.2. the market risk premium is 6 percent and t-bills are currently yielding

  If payback period measures the expected number of years

if payback period measures the expected number of years required to recover the original investment what does

  What is the conversion value of the bond what is the

oreilly moving company has a 1000 par value convertible bond outstanding that can be converted into 25 shares of common

  Should the firm undertake the healthy bottled water project

CWC has a 34% marginal tax rate. For the purposes of this project, working capital effects will be ignored.

  How do the findings compare with the industry averages

2015 Tesla Motors - 2E. How do the findings compare with the industry averages? Explain why you selected the proposed industry. If the company does not have a clear comparable industry then compare with three closest competitors.

  Price of a? one-year european call option

Dynamic Energy Systems stock is currently trading for $ 29 per share. The stock pays no dividends.

  You have applied for a home mortgage of 75000 to finance

loan amortization. you have applied for a home mortgage of 75000 to finance the purchase of a new home for 30 years.

  Compute the underwriters spread in dollars per share on the

dipitros paint and wallpaper inc. needs to raise 2.493 million to finance plant expansion. in discussions with its

  Identify possible risks for money cares investment

For this assignment you must identify possible risks for the Money Cares Investment Corporation. In establishing an investment company, you must answer the following

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd