PROBLEM 1 – Hedge of a FCT (sale) by a non-derivative Forward contract

Ilocandia Corporation, a Filipno company, enters into a forward exchange contract on October 1,
2014 to hedge a foreign currency risk in US dollars. The contract is for the sale of $100,000 to the
international bank for delivery on March 31, 2015. The company anticipates the dollar will
weaken against the peso. Relevant exchange rates for the US dollars are as follows:

10/01/2014 12/31/14 03/31/15

Spot rate ₱46.35 ₱46.00 ₱45.60
30-day forward 46.25 45.50 46.00
90-day forward 46.28 45.80 45.60
180-day forward 46.30 43.60 45.00

REQUIRED: Reconstruct all journal entries for the foreign currency transaction and the forward
contract in the books of Ilocandia under the following assumptions.
a. Fair value of forward contracts is based on forward rates.
b. Fair value of forward contracts is based on spot rates.

PROBLEM 2 – Hedge of a FCT (Purchase) by a derivative Forward Contract.

Bicolandia Company purchased merchandise from a foreign vendor for FC 100,000. The
merchandise is received on November 1, 2014, payment is due on January 31, 2015. Also, on
November 1, 2014, Bicolandia enters into a 90-day forward contract for the purchase of FC
100,000 for delivery on January 31, 2015, as a hedge of the foreign currency transaction.
Relevant exchange rates for the foreign currency follow:

11/01/2014 12/31/14 01/31/15

Spot rate ₱0.55 ₱0.56 ₱0.55
30-day forward 0.56 0.58 0.57
60-day forward 0.56 0.59 0.58
90-day forward 0.57 0.58 0.59

REQUIRED: Prepare all journal entries for the hedged item and the forward contract, based on
the above information. Ignore discounting for simplicity.

PROBLEM 6 – Hedge of foreign currency risk on asset exposure by a derivative Option

Contract.
On December 1, 2014, Luzon Corporation delivers merchandise to a foreign buyer which agreed
to pay FC 1,000,000 on March 1, 2015. To hedge the foreign currency risk against unfavorable
exchange rate changes during the 90-day period, Luzon enters into a derivative option contract
to sell FC 1,000,000 for delivery on March 1, 2015.

Luzon Corporation pays a premium of P0.009 per FC unit. Hence, the purchase price for the
option is P9,000, i.e. FC1,000,000 X P0.009.

Relevant market price (spot rate) and strike price at relevant dates follow:

12/01/2014 12/31/14 03/01/2015

Market price (spot rate) ₱1.32 ₱1.33 ₱1.30
Strike price (exercise price) 1.32 1.32 1.32

REQUIRED: Prepare journal entries in the books of Luzon Corporation if the hedge is designated
as a FAIR VALUE HEDGE.