Question

# On June 1, Vandervelde Corporation (a U.S.-based manufacturing firm) received an order to sell goods to...

On June 1, Vandervelde Corporation (a U.S.-based manufacturing firm) received an order to sell goods to a foreign customer at a price of 130,000 leks. Vandervelde will ship the goods and receive payment in three months on September 1. On June 1, Vandervelde purchased an option to sell 130,000 leks in three months at a strike price of \$1.04. It properly designated the option as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the spot rate. Relevant exchange rates and option premiums for the lek are as follows:

 Date Spot Rate Put Ooption Premium for 9/1 (Strike price \$1.04 June 1 1.04 0.024 June 30 1.00 0.028 September 1 0.95 N/A

b. What is the impact on net income over the two accounting periods? (Do not round intermediate calculations. In case of negative impact on net income, answer should be entered with a minus sign. Round your final answers to nearest whole dollar.)

c. What is the net cash inflow resulting from the sale of goods to the foreign customer?

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 Impact on Net Income b. For the second quarter For the third quarter Over the second and third quarters c. Net cash inflow

Since the option is designated at fair value, any change in its value at a reporting date will be recorded in P&L. The firm's commitment is also a current monetary item. Therefore any changes in its value on a reporting date will be recorded in P&L.

b)

 For second quarter: (\$) Loss of firm commitment =(130000*(1.00-1.04)) -5,200.00 Gain on Put option =(130000*(0.028-0.024)) 520.00 Total impact on net income -4,680.00 For third quarter: (\$) Loss of firm commitment =(130000*(0.95-1.00)) -6,500.00 Gain on Put option excercise =(130000*(1.40-0.95)) 58,500.00 Total impact on net income 52,000.00

Over the second and third quarters = -4680+52000 = \$47,320

c)

 Net Cash inflow (\$) Cash outflow on purchase of option =(0.024*130000) -3,120.00 Cash inflow on date of settlement =(130000*1.04) 135,200.00 Net Cash inflow 132,080.00

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