Hedging:
Hedging against an investment risk is termed for strategically implementing the instruments and tools in the market to minimize the risk and effects of any adverse price movements. It can be said that investors are benefitted through hedging as they hedge one investment by making another investment.
To calculate:
A schedule by showing its effect on current earnings through hedging relationship.
Answer to Problem M.6P
Total net loss from call option B is
Explanation of Solution
Calculation of change in time value excluded from effectiveness as follows:
Note:
Consecutively for next months
Call option B
Particulars | July (in $) | August (in $) | September (in $) | Total(in $) |
Unrealized gain (loss): | ||||
| | | ||
| | | ||
| | | ||
Net gain (loss) | | | | |
Calculation of unrealized gain (loss) as follows:
Note:
Hedge is not effective which does not quality for special hedge.
Put Option C
Particulars | July (Amount be $) | August (Amount in $) | September (Amount In $) | Total (Amount be $) |
Sales revenue | | | ||
Cost of sales | | | ||
Adjustment to cost of sales — Intrinsic value at July 1 of $0 versus intrinsic value at | | | ||
Gross profit on sales | | | ||
Change in time value excluded from effectiveness. | ||||
Time value of | | | ||
Time value of | | | ||
Time value of | | | ||
Net gain (loss) | | | | |
Working note:
Calculation of adjustment to cost of sales as follows:
Futures contract D
Particulars | July (Amount in $) | August (Amount in $) | September (Amount in $) | Total (Amount in $) |
Change in the time value excluded from effectiveness: | | | | |
Net gain (loss) | | |
Note:
Numbers of units is 10,000 future prices of $10per unit.
Interest rate swap:
Particulars | July (Amount in SI | August (Amount in $) | September (Amount in SI | Total (Amount in S) |
Variable interest income | ||||
| | | ||
| | | ||
| | | ||
Settlement of fixed variable difference: | ||||
| | | ||
| | | ||
Net interest Income | | | | |
Note:
LIBOR for July is
LIBOR for August is
LIBOR for September is
Fixed rate of interest is
Conclusion
Total net loss from call option B is
Want to see more full solutions like this?
Chapter 9 Solutions
Advanced Accounting
- 21 Details for one of the loan of BB Company that is probably impaired during the period is as follows: The company made a loan of P40,000,000 to a customer with similar credit risk to BB Company on January 1, 2021. Interest is receivable on this loan at the end of each year at 2% per annum for the next five years. The loan was properly recorded and classified as amortized cost. The company made and initial assessment of the loan and the total expected credit losses over the life of the loan was P1,000,000. The discount rate applicable was at 2%. On January 1, 2021, the probability of default over the next 12 months was 5%. At December 31, 2021, there was a significant increase in the credit risk on the loan made by BB Company, the expert assessed that the total expected credit losses over the life of the loan was increase to P2,200,000. The discount rate applicable was at 2%. How much is the balance of the allowance for credit losses as of December 31, 2021?arrow_forwardTicker Services began operations in Year 1 and holds long-term investments in available-for-sale debt securities. The year-end cost and fair values for its portfolio of these investments follow. Portfolio of Available-for-Sale Securities December 31, Year 1 December 31, Year 2 Cost $ 13,000 20,000 23,000 16,500 December 31, Year 3 December 31, Year 4 Complete this question by entering your answers in the tabs below. Prepare journal entries to record each year-end fair value adjustment for these securities. Adjustment General Journal Calculation Calculation adjustment required to fair value adjustment. 12/31/Year 1 Existing balance in Fair Value Adjustment-AFS (LT) Required balance in Fair Value Adjustment-AFS (LT) Adjustment required to Fair Value Adjustment-AFS (LT) 12/31/Year 2 Existing balance in Fair Value Adjustment-AFS (LT) Required balance in Fair Value Adjustment-AFS (LT) Adjustment required to Fair Value Adjustment-AFS (LT) 12/31/Year 3 Existing balance in Fair Value…arrow_forwardTicker Services began operations in Year 1 and holds long-term investments in available-for-sale debt securities. The year-end cost and fair values for its portfolio of these investments follow. Portfolio of Available-for-Sale Securities December 31, Year 1 December 31, Year 2 December 31, Year 3 December 31, Year 4 View transaction list View journal entry worksheet Prepare journal entries to record each year-end fair value adjustment for these securities. No 3 Cost $11,000 18,900 20,600 14,800 Date Dec. 31, Year 3 No Transaction Recorded Fair Value $17,500 28,000 30, 200 19,700 General Journal Debit Credit Ⓒarrow_forward
- Show work and discuss result after Finding the approximate market value of a long position in an FRA at a fixed rate of 5 percent in which the contract expires in 20 days, the underlying is 180-day LIBOR, the notional principal is $25 million, the 20-day rate is 7 percent, and the 200-day rate is 8.5 percentarrow_forwardComplete the following table by putting the proper amount in each column: Assume that $100,000 was invested in each of the following classifications and the market value at the end of the year was $95,000. (For the Current Long term column indicate which classification is correct assuming there are no current maturities on long-term investments) Investment Type Carrying Value Current (C) or Long Term (LT) Adjustment To Income Adjustment to Other Comp Inc Debt Investment Trading Available-For-Sale Held-to-Maturity Equity Investment < 20% Ownership >21%,<50% Ownershiparrow_forwardOn January 1, Windsor, Inc. sold used equipment with a cost of $17,000 and a carrying amount of $2,300 to Swifty Corporation in exchange for a $5,100, three-year non-interest-bearing note receivable. Although no interest was specified, the market rate for a loan of that risk would be 7%. Assume that Windsor follows IFRS. Click here to view the factor table PRESENT VALUE OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY OF 1. (a) Prepare the entry to record the sale of Windsor's equipment and receipt of the note. (Round answers to O decimal places, e.g. 5,275. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts.) Account Titles and Explanation Debit Credit Notes Receivable Accumulated Depreciation - Equipment Equipment 1700 Gain on Disposal of Equipmentarrow_forward
- Apollo Corp. has the following investment which were held throughout 2021-2022: Fair Value Cost 12/31/21 12/31/22 Trading P300,000 P400,000 P380,000 What amount of unrealized gain or loss would Apollo Corp. report in its income statement for the year ended December 31, 2022 related to its investments? O P20,000 unrealized loss. O P20,000 unrealized gain. O P80,000 unrealized gain. O P140,000 unrealized gain.arrow_forwardMachinery with a fair value of $63,000 is acquired in a non-cash exchange. Below are five independent assumptions (a) to (e) as to the consideration given in the exchange: A non-interest-bearing note for $72,450 maturing in one year. Notes of similar risk required 15% interest at the date of the exchange. Cash of $23,000 plus a payment of $46,000 after 12 months. The market interest rate is 15%. Land with a book value of $37,000 and a market value of $64,000. A similar kind of used machinery with a net book value of $36,700 and a fair value of $45,800, plus cash of $16,800. When new, the used machinery cost $56,400. There will be no change in cash flows from operating activities as the result of this exchange. Inventory carried at $42,750 on the most recent balance sheet as part of a perpetual inventory carried at LCM. Cash flows are different as a result. Give the journal entry required for each of the above independent assumptions.arrow_forwardOn January 1, Windsors Inc. sold used equipment with a cost of $15,000 and a carrying amount of $2,100 to Novak Corp. in exchange for a $5,000, three-year non-interest-bearing note receivable. Although no interest was specified, the market rate for a loan of that risk would be 9%. Assume that Windsors follows IFRS. Click here to view the factor table PRESENT VALUE OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY OF 1. Your answer is incorrect. Prepare the entry to record the sale of Windsors' equipment and receipt of the note. (Round answers to O decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts. List all debit entries before credit entries. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Account Titles and Explanation Debit Creditarrow_forward
- Can you help me to calculate adjusted net income, adjusted net income if FV of security B were 285,000, value of held for trading securities as of 12/31/2020 and assuming these securities at measured at FVOCI, calculate the value of these financial assets as of 12/31/2020 Problem: ABC Corporation buys and sells securities expecting to earn profits on short term differences in price. during 2020, ABC Corporation purchased the following held for trading securities. Security A: Cost- 195,000; FV at 12/31/2020- 225,000 Security B: Cost- 300,000; FV at 12/31/2020- 162,000 Security C: Cost- 678,000; FV at 12/31/2020- 660,000 Before any adjustments related to these securities, ABC Corporation had net income of 900,000arrow_forwarda. On January 1st, 2021, an investor enters into a 9-month forward contract on an asset. In February,April, June, and September, dividends are paid on the asset at a rate of 3%. In other months,dividends are paid at a rate of 2%. All dividend yields are expressed in semiannual compounding.The risk-free rate of interest over the period is 8% per annum with continuous compounding andthe asset is worth $45.00 at contract initiation.What is the no-arbitrage price of the forward contract? b. What is the Convenience Yield and what does a higher or lower convenience yield reflect? c. Coming out of the COVID-19 pandemic and considering the Russia-Ukraine war, would youexpect the convenience yield to lead to a normal or inverted market for oil futures prices?Explainarrow_forwardAssume Car Co. sells cars totaling $500,000 that cost them $425,000. Car Co. finances the purchase for its customers and charges 5.75% for a 48 month term. It then securitizes the $500,000 receivables at a yield of 5.625% and sells the security to an investor for $510,000. Prepare the journal entries to reflect these transactionsarrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT