Exchange rates and hedging
On October 1, 2009 Glenn Company accepted a shipment of beer from Germany. The purchase contract specifies payment of 3,000,000 Euros is to be made on December 1, 2009. The exchange rate on October 1, 2009 was: $1 = 1.4 Euros.
Instructions:
(a) If the exchange rate on December 1, 2009 is: $1 = 1.18 Euros, what amount of gain or loss due to the exchange rate fluctuation will be recognized on the purchase?
(b) On October 1, Glenn's analysts were forecasting the exchange rate to be: $1 = 1.20 Euros on December 1, 2009. Glenn can enter into a hedging contract on October 1, 2009 whereby the bank will accept $2,480,000 in exchange for 3,000,000 Euros on December 1. The bank will charge a $2,000 fee to enter into the agreement. Should Glenn enter into the hedge agreement?
(c) If Glenn enters into the hedging contract, what will be the exchange gain/loss recorded on December 1, 2009?

Question

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The Answer of Exchange rates and hedging
On October 1, 2009 Glenn Company accepted a shipment of beer from Germany. The purchase contract specifies payment of 3,000,000 Euros is to be made on December 1, 2009. The exchange rate on October 1, 2009 was: $1 = 1.4 Euros.
Instructions:
(a) If the exchange rate on December 1, 2009 is: $1 = 1.18 Euros, what amount of gain or loss due to the exchange rate fluctuation will be recognized on the purchase?
(b) On October 1, Glenn's analysts were forecasting the exchange rate to be: $1 = 1.20 Euros on December 1, 2009. Glenn can enter into a hedging contract on October 1, 2009 whereby the bank will accept $2,480,000 in exchange for 3,000,000 Euros on December 1. The bank will charge a $2,000 fee to enter into the agreement. Should Glenn enter into the hedge agreement?
(c) If Glenn enters into the hedging contract, what will be the exchange gain/loss recorded on December 1, 2009?

Exchange Rates and Hedging