Question

In: Accounting

Jackson Auto Parts Manufacturer, a U.S. based manufacturer of piston rings and other auto parts sold...

Jackson Auto Parts Manufacturer, a U.S. based manufacturer of piston rings and other auto parts sold parts to a South Korean Auto Manufacturer on December 1, 2020 with payment in 10 million South Korean Won to be received on March 31, 2021. The following exchange rates are relevant:

Date: Spot Rate Forward Rate

Dec 1, 2020 $0.0035 $0.0034

Dec 31, 2020 $0.0033 $0.0032

March 31 2021 $0.0038 $0.0032

Assuming Jackson did not hedge its foreign exchange risk, how much foreign exchange gain or loss should it report on its fiscal year end December 31, 2020 financial statements/

Assuming that Jackson did in fact decide to hedge its foreign exchange risk and entered into a forward exchange contract to sell 10 million South Korean Won on December 1, 2020 as a fair value hedge of a foreign currency receivable, what is the net impact on Jackson’s 2020 net income resulting from a fluctuation in the value of the Won? Ignore time value of money.

Defend your answer.

Expert Solution

Jackson auto Parts Manufacturers is a US Company has F C Receivable of 10 Millions South Koreans on March 31, 2021

CASE 1 : No Hedging

In this Case Spot Rate at March 31, 2021 is applicable.

1 South Korean = $0.0038

10 Millions South Koreans = $38000

Gain on No Hegding =(Spot Rate on March 31, 2021 - Spot Rate on December 1, 2020)*Foreign Currency

= (0.0038$-0.0035$)*10000000 South Koreans

= $3000.

CASE : By entering into Forward Contact

in the case Forward Rate, We are Assume that Company enter into a Forword Contract on date of December 1, 2020

1 South Korean = 0.0034$

10 Millions South Koreans = 34000$

Loss on entering into a Forword Contract =

$35000-$34000=$1000.

Expected Gain = ($0.0038-$0.0035)*10 Millions south Koreans = $3000(No Hegding)

NOTE:

1. Therefore loss do to By entering into a Forward Contract by Jackson Auto Parts, It is advisable that Company not enter the Forward Contract, in this Company gain the $3000,instead of Entering into Forward contact Loss of 1000$.

2. South Koreans Symbol not available, it is

-W-.

ekkarill92 answered 2 years ago

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