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What is the most that honey ltd can lose

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Reference no: EM132569617

Question - Happy Ltd, a New Zealand company, has sold US$150,000 of products to the US, to receive cash exactly one month later. At the time of sale, the spot rate of exchange is US$0.55, that is, NZ$1 buys US$0.55. Honey Ltd wishes to hedge the currency risk associated with this transaction, so on the day of the sale, the company buys a put option - that is, it buys the right to sell US$150,000 at an exercise price of US$0.57 one month later. The option costs $3,000 in cash. The relevant information is shown in the table below:

 

Spot rate

Option value

At the date of sale

0.55

$3,000

One month later (i.e., at settlement)

0.62

 

REQUIRED -

(i) In accordance with NZ IFRS 9, show the journal entry to record the sale and any additional journal entries that are required through to (and including) settlement.

(ii) What is the most that Honey Ltd can lose overall in this hedging activity (regardless of what the exchange rate is at settlement date)? Show all your workings.

Reference no: EM132569617

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