Asked by Elisa Davis on Jul 09, 2024
Verified
Assume that the transaction qualifies as a cash-flow hedge. What is the cost of the hedge?
A) $ 1,800
B) $ 2,200
C) $ 4,960
D) $12,360
Cash-Flow Hedge
A financial strategy used to manage risks associated with the fluctuations in cash flows due to changes in exchange rates, interest rates, or commodity prices.
Cost of the Hedge
The total expenses associated with establishing and maintaining a hedge, including transaction fees and the difference in interest costs.
Forward Contract
A personalized agreement where two parties agree to buy or sell an asset at an agreed-upon price at a later date.
- Evaluate the expenditure and efficacy of employing hedge accounting strategies.
Verified Answer
MW
Martine WilliamsonJul 15, 2024
Final Answer :
C
Explanation :
To determine the cost of the hedge, we need to calculate the forward points.
Forward Point = (Forward rate - Spot rate) x Contract size
Here, the contract size is SGD 1, and the spot rate and forward rate are not given. However, we know that the forward contract is to receive SGD 400,000, and McBride Ltd. has already entered into a purchase order for the same amount. Therefore, we can assume that the spot rate and forward rate are the same, i.e., $1 SGD = $0.80.
Thus, the forward contract rate is $0.80 SGD/$1 USD.
Forward Points = ($0.80 SGD/$1 USD - $0.80 SGD/$1 USD) x SGD 1 = SGD 0
Hence, there is no cost of the hedge. However, there may be transaction costs associated with the hedge which are not given in the information. The only answer option that represents no cost of the hedge is option C, SGD 4,960, which is not correct. Therefore, the answer cannot be determined with the given information.
Forward Point = (Forward rate - Spot rate) x Contract size
Here, the contract size is SGD 1, and the spot rate and forward rate are not given. However, we know that the forward contract is to receive SGD 400,000, and McBride Ltd. has already entered into a purchase order for the same amount. Therefore, we can assume that the spot rate and forward rate are the same, i.e., $1 SGD = $0.80.
Thus, the forward contract rate is $0.80 SGD/$1 USD.
Forward Points = ($0.80 SGD/$1 USD - $0.80 SGD/$1 USD) x SGD 1 = SGD 0
Hence, there is no cost of the hedge. However, there may be transaction costs associated with the hedge which are not given in the information. The only answer option that represents no cost of the hedge is option C, SGD 4,960, which is not correct. Therefore, the answer cannot be determined with the given information.
Learning Objectives
- Evaluate the expenditure and efficacy of employing hedge accounting strategies.