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# Accounting Practice Problems and Solutions

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Practice problems for Module 4​​

• ABC Corporation negotiated a forward contract to sell C\$100,000 in one year at a forward rate of C\$1=\$0.80. ​​ On the delivery date, the spot rate was C\$1=\$0.83.  ​​​​

How much is the revenue ABC Corporation can get from the forward hedge?​​

Revenue from the forward hedge= C\$100,000*C\$0.80/\$

= \$80,000

ABC​​ Corporation​​ earns almost \$80,000​​ in revenue through the forward hedge.​​

​​ What is the real cost of hedging receivables for this U.S. firm?

Hedging of Real cost = Revenue without hedging less revenue with hedging

= \$(100,000*)-\$80,000 = \$3000

For this U.S. company, the actual cost of hedging receivables is \$3000, which is the contract's cost.

• Given the following additional information​​

 Future Spot rate​​ RCHr​​ Prob.​​ 0.78​​ -2000​​ 0.20​​ 0.81​​ ​​ 1000​​ 0.50​​ 0.83​​ ​​ 3000​​ 0.30​​

What is the probability that the forward hedge will result in higher revenue than no border?

How much is E(RCHr)? Overall, is forward hedge preferred?​​

E(RCHr) = (-2000*0.20) + (1000*0.50) + (3000*0.30) =1000

In higher revenue than no hedge Profibility that forward hedge will result = Expected future spot rates is less than the forward rate (Nil)

With hedge revenue = E(RCHr) * 0.83

= 1000*0.83=\$830

Without hedge revenue= (-2000*0.20*0.78)​​ +​​ (1000*0.50*0.81) + (3000*0.30*0.83)​​

= \$840

Revenue with hedge is less than expected revenue without hedge that’s why overall hedge is not preferred.

• Lora Corp. needs NZ\$100,000 in 180 days. ​​ The 180-day forward rate is NZ\$1=\$.52.​​

 Spot rate​​ Prob.​​ \$0.40​​ 5%​​ 0.45​​ 10%​​ 0.48​​ 30%​​ 0.50​​ 30%​​ 0.53​​ 20%​​ 0.55​​ 5%​​

What is the probability that the forward hedge will result in higher cost than no border?

How much is E(RCHp)? Overall, is forward hedge preferred?​​

NZ\$1 is the forward obtainable = \$0.52.​​

Hedge rate more significant than the forward rates therefore add all the probabilities of the 180 day.

​​ In this case forward hedge will cost higher than no border there is a 75% probability.

 NZ \$ Probable spot rate Probability 100000 NZ \$ hedging nominal cost 100000 NZ \$ price of unhedged100000\$ * Spot rate Hedging real cost subtract unhedged cost - nominal 0.4 5% 52000 40000 12000 0.45 10% 52000 45000 7000 0.48 30% 52000 48000 4000 0.5 30% 52000 50000 2000 0.53 20% 52000 53000 -1000 0.55 5% 52000 55000 -3000

We can calculate E(RCHp) depend on the above calculations:

5%*(\$12,000) + 10%*(\$7000) +30%*(\$4,000) + 30%*(\$2000) + 20%*(-\$1000) + 5%*(-\$3000) = \$600 + \$700 + \$ 1200 +\$600- \$200- \$150 = \$2,750

Companies like to know their future cash outflows because of this forward hedge are preferred.

 90-day U.S. interest rate​​ 4%​​ 90-day Malaysian interest rate ​​ 3%​​ 90-day MYR forward rate​​ \$.40​​ MYR spot rate ​​ \$.404​​

Santa Barbara Co. will need 300,000​​ ringgits​​ in 90 days.​​

How much MYR do you need after currency conversion today?​​

Requirement = 3,00,000 ringgit after 90 days.

If forward rate is used USD needed = 3,00,000 * 0.4

= \$1,20,000

How many U.S. dollars do you need to borrow today to get the amount of MYR you need?

Today USD needed =​​ (\$300000/1.03)​​ *0.404 = \$ 1,17,670

For 90 days, Malaysia's interest rate is 3%, Malaysian ringit today we will have to invest value. The said amount should then be sold spot.

How many U.S. dollars do you need to pay off after 90 days?​​

After 90 days US dollars needed to be paid off =​​ \$ 1,17,670*1.04 = \$1,22,377

For 90​​ days interest rate in US is 4%, at the said rate for the 90 days we will borrow the dollars.​​

 180-day U.S. interest rate​​ 8%​​ 180-day British interest rate​​ 9%​​ 180-day pound forward rate​​ \$1.50​​ U.K. pound spot rate​​ \$1.48​​

Riverside Co. will receive 400,000 pounds in 180 days. ​​

How much foreign currency do you need today in a money market hedge?​​

Requirements = 4,00,000 pounds in 180 days

Foreign currency= 400000 * 0.8

= 320000​​ foreign​​ currencies​​ required​​ today in money Market hedge.

How many U.S. dollars do you receive from the currency conversion today?​​

Today USD needed =​​ (\$400000/1.09)​​ *​​ 0.015 = \$ 5504.58

For 90 days the interest rate in British is 9%

How much will be available to Riverside Co. after 180​​ days?​​

5504.5871* 1.09= \$6000​​ U.S. dollar will be available after​​ 180 days.