Zerlie's Imports purchased automotive parts from a German firm on July 1, 20X1. The parts cost 150,000 Euros to be paid for on August 15. To pay for the parts, Zerlie's Imports borrowed 150,000 euros from a German bank on July 16. The loan bears an 11% interest rate to be repaid on August 15 in euros.
Another option would have been for Zerlie's to have hedged the purchase with a forward exchange contract on July 1 to buy 150,000 euros at a forward rate of $0.67. Exchange rates were as follows:
Required:
a.
Compute the effect on net income assuming the following:
(1)
Zerlie did not borrow to pay for the transaction or hedge the transaction on July 1.
(2)
Zerlie borrowed from the German bank on July 16.
(3)
Zerlie hedged the full purchase on July 1.
** ignore present values and discount rates
b.
Determine which of these three alternatives would have been the best for Zerlie under the situation described.

Question

Zerlie's Imports purchased automotive parts from a German firm on July 1, 20X1. The parts cost 150,000 Euros to be paid for on August 15. To pay for the parts, Zerlie's Imports borrowed 150,000 euros from a German bank on July 16. The loan bears an 11% interest rate to be repaid on August 15 in euros.
Another option would have been for Zerlie's to have hedged the purchase with a forward exchange contract on July 1 to buy 150,000 euros at a forward rate of $0.67. Exchange rates were as follows:
  Required: 
a.
Compute the effect on net income assuming the following:
(1)
Zerlie did not borrow to pay for the transaction or hedge the transaction on July 1.
(2)
Zerlie borrowed from the German bank on July 16.
(3)
Zerlie hedged the full purchase on July 1.
** ignore present values and discount rates
b.
Determine which of these three alternatives would have been the best for Zerlie under the situation described.

Quizplus · Accepted Answer

The Answer of Zerlie's Imports purchased automotive parts from a German firm on July 1, 20X1. The parts cost 150,000 Euros to be paid for on August 15. To pay for the parts, Zerlie's Imports borrowed 150,000 euros from a German bank on July 16. The loan bears an 11% interest rate to be repaid on August 15 in euros.
Another option would have been for Zerlie's to have hedged the purchase with a forward exchange contract on July 1 to buy 150,000 euros at a forward rate of $0.67. Exchange rates were as follows:
  Required: 
a.
Compute the effect on net income assuming the following:
(1)
Zerlie did not borrow to pay for the transaction or hedge the transaction on July 1.
(2)
Zerlie borrowed from the German bank on July 16.
(3)
Zerlie hedged the full purchase on July 1.
** ignore present values and discount rates
b.
Determine which of these three alternatives would have been the best for Zerlie under the situation described.

Zerlie's Imports Purchased Automotive Parts from a German Firm on July