Concord Company, a U.S. company, made credit sales to four customers in Asia on September 15, 2018, and received payment on October 15, 2018. Information related to these sales is shown below: Concord Company Sales Transactions September 15, 2018 Customer Location Invoice Price Currency Prima Industries Ltd Mumbai 7,195,000 Indian rupees (INR) Samal Island Group Cebu City 5,417,000 Philippine peso (PHP) Yokama Properties Inc Osaka 11,210,000 Japanese yen (JPY) Kinabalu Trading Ltd Johur Bahru 414,000 Malaysian ringgit (MYR) The Concord Company’s fiscal year ends on September 30. Required: 1. Use historical exchange rate information available on the Internet x-rates, Historical Lookup, to find the exchange rates between the U.S. dollar and each foreign currency for September 15, September 30, and October 15, 2018. 2. Determine the foreign exchange gains and losses that Concord Company would have recognized in net income in the fiscal years ended September 30, 2018 and September 30, 2019, and the overall foreign exchange gain or loss for each transaction. 3. Explain how and why some companies use hedges for foreign currency transactions. Determine for which transaction, if any, it would have been important for Concord Company to hedge its foreign exchange risk. 4. Concord Company could have acquired a one-month put option on September 15, 2018, to hedge the foreign exchange risk associated with each of the four export sales. In each case, the put option would have cost $100 with the strike price equal to the September 15, 2018, spot rate. Determine for which hedges, if any, Concord Company would have realized a net cash flow benefit from the foreign currency option.
Concord Company, a U.S. company, made credit sales to four customers in Asia on September 15, 2018, and received payment on October 15, 2018. Information related to these sales is shown below:
Concord Company
Sales Transactions
September 15, 2018
Customer Location Invoice Price Currency
Prima Industries Ltd Mumbai 7,195,000 Indian rupees (INR)
Samal Island Group Cebu City 5,417,000 Philippine peso (PHP)
Yokama Properties Inc Osaka 11,210,000 Japanese yen (JPY)
Kinabalu Trading Ltd Johur Bahru 414,000 Malaysian ringgit (MYR)
The Concord Company’s fiscal year ends on September 30. Required:
1. Use historical exchange rate information available on the Internet x-rates, Historical Lookup, to find the exchange rates between the U.S. dollar and each foreign currency for September 15, September 30, and October 15, 2018.
2. Determine the foreign exchange gains and losses that Concord Company would have recognized in net income in the fiscal years ended September 30, 2018 and September 30, 2019, and the overall foreign exchange gain or loss for each transaction.
3. Explain how and why some companies use hedges for foreign currency transactions. Determine for which transaction, if any, it would have been important for Concord Company to hedge its foreign exchange risk.
4. Concord Company could have acquired a one-month put option on September 15, 2018, to hedge the foreign exchange risk associated with each of the four export sales. In each case, the put option would have cost $100 with the strike price equal to the September 15, 2018, spot rate. Determine for which hedges, if any, Concord Company would have realized a net cash flow benefit from the foreign currency option.
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