Case 7-2 International Accounting
1. Use historical exchange rate information available on the Internet at www.oanda.com to find interbank exchange rates between the U.S. dollars and each foreign currency for period December 15, 2009, to January 15, 2010. Currency | Foreign Currency Account Payable | Exchange Rate on 12/15/09 | U.S. Dollar Value on 12/15/09 | Exchange Rate on 12/31/09 | U.S. Dollar Value on 12/31/09 | Foreign Exchange Gain (Loss) at year end | Brazilian reals (BRL) | 55,000 | 0.5697 | $31,333.50 | 0.5716 | $31,438.00 | ($104.50) | Guatemalan quetzals (GTQ) | 255,000 | 0.1185 | $30,217.50 | 0.1180 | $30,090.00 | $127.50 | Mexican pesos (MXN) | 400,000 | 0.0777 | $31,080.00 | 0.0767 | $30,680.00 | $400.00 | | | | | | | $423.00 |
2. Determine the foreign exchange gains and losses that Portofino would have recognized in net income in 2009 and 2010, and the overall foreign exchange gain or loss for each transaction. Determine for which transaction it would have been most important for Portofino to hedge its foreign exchange risk. Currency | Foreign Currency Account Payable | Exchange Rate on 12/31/09 | U.S. Dollar Value on 12/31/09 | Exchange Rate on 1/15/10 | U.S. Dollar Value on 1/15/10 | Foreign Exchange Gain (Loss) at 1/15/10 | Brazilian reals (BRL) | 55,000 | 0.5716 | $31,438.00 | 0.5659 | $31,124.50 | $313.50 | Guatemalan quetzals (GTQ) | 255,000 | 0.1180 | $30,090.00 | 0.1171 | $29,860.50 | $229.50 | Mexican pesos (MXN) | 400,000 | 0.0767 | $30,680.00 | 0.0786 | $31,440.00 | ($760.00) | | | | | | | ($217.00) |
Portofino would have reported a net foreign exchange gain of $423.00 in 2009 and a net foreign exchange loss of ($217.00) in 2010.
BRL= $209.00 GAIN
GTQ= $356.50 GAIN
MXN= $360.00 LOSS
The transaction denominated in Mexican pesos resulted in the largest overall foreign exchange loss ($360.00) and is the most important to hedge.
3. Portofino could have acquired a one-month call option on December 15, 2009, to hedge the
2. Determine the foreign exchange gains and losses that Portofino would have recognized in net income in 2009 and 2010, and the overall foreign exchange gain or loss for each transaction. Determine for which transaction it would have been most important for Portofino to hedge its foreign exchange risk. Currency | Foreign Currency Account Payable | Exchange Rate on 12/31/09 | U.S. Dollar Value on 12/31/09 | Exchange Rate on 1/15/10 | U.S. Dollar Value on 1/15/10 | Foreign Exchange Gain (Loss) at 1/15/10 | Brazilian reals (BRL) | 55,000 | 0.5716 | $31,438.00 | 0.5659 | $31,124.50 | $313.50 | Guatemalan quetzals (GTQ) | 255,000 | 0.1180 | $30,090.00 | 0.1171 | $29,860.50 | $229.50 | Mexican pesos (MXN) | 400,000 | 0.0767 | $30,680.00 | 0.0786 | $31,440.00 | ($760.00) | | | | | | | ($217.00) |
Portofino would have reported a net foreign exchange gain of $423.00 in 2009 and a net foreign exchange loss of ($217.00) in 2010.
BRL= $209.00 GAIN
GTQ= $356.50 GAIN
MXN= $360.00 LOSS
The transaction denominated in Mexican pesos resulted in the largest overall foreign exchange loss ($360.00) and is the most important to hedge.
3. Portofino could have acquired a one-month call option on December 15, 2009, to hedge the