FORWARD CONTRACT

ILLUSTRATION 1: PAUL CORP

Paul Corp. entered into a forward contract to hedge a sale of inventory in

October 26, 2030 to be collected on January 24, 2031, 72,000 FC (foreign
currency) in 90 days. The relevant exchange rates as follows:

Spot rate Forward rate

(1/24/31)
October 26, 2030 P52.73 P52.77
December 31, 2030 P52. 82 P52.89
January 24, 2031 P52.94

Req. 1: What is the net forex gain (loss) from this transaction and hedge
that will be reported on Paul’s 2030 statement of income?

loss

Req. 2: The fair value of the forward contract on October 26, 2030:
Req. 3: Determine the cost of Paul of entering into hedge of the foreign
currency on October 26, 2030:

Req. 4: The total sales to be recorded in the 2030 income statement:

Req. 5: The fair value of the forward contract on December 31, 2030?
ILLUSTRATION 2: ZEST
Zest Company sold merchandise for 111,200 euros to a customer in
France on November 02, 2022. Collection in euros was due on January 31,
2023. On the same date, to hedge this foreign currency exposure, Zest
Company entered into a futures contract to sell 111,200 euros to Metro
bank for delivery on January 31, 2023.

Exchange rates for euros on different dates are as follows:

Nov. 2 Dec. 31 Jan. 31
Spot rate 81.9 80.7 80.1
30 – day futures 82.3 80.4 83.9
60 – day futures 81.8 80.3 82.6
90 – day futures 80.6 81.6 83.4
120 – day futures 80.1 81.4 82.8

Req. 1: What amount will affect profit or loss regarding the hedged item on
the financial statement date in 2022? loss
Req. 2: What amount will affect profit or loss regarding the hedging
instrument on the settlement date in 2023? gain

Req. 3: As a result of all foregoing transactions, what amount will current

earnings on the settlement date in 2023?

gain
loss

loss (
minus, then kung ano mas mataas yun ang effect)
ILLUSTRATION 3: BACOLOD
Bacolod Company acquired machinery for 150,000 lira from a vendor in
Turkey on December 1, 2030. Payment in Turley lira was due on March 31,
2031. On the same date, to hedge this foreign currency exposure, Bacolod
Company entered into a futures contract to purchase P150,000 lira from a
bank delivery on March 31, 2031. Exchange rates for pounds on different
dates are as follows:
 Dec. 1 Dec. 31 Mar. 31
Selling spot rate 41.4 42.3 43.7
30 – day futures 42.3 41.8 43.2
60 – day futures 41.8 42.2 42.6
90 – day futures 40.6 42.5 43.4
120 – day futures 42.2 42.8 42.9

What was the net impact in Bacolod Company’s income in 2030 as a result
of this hedging activity?
 SPECULATION
ILLUSTRATION 1: VELOCITY COMPANY
: The following data applies to Velocity Company’s purchase of 45,400
Belgium francs under a forward contract dated November 1, 2022 for
delivery on January 31, 2023:

11/1/22 12/31/22 01/31/23

Spot rate P55.75 P53.90 P54.50
30 – day forward rate P51.30 P56.15 P53.20
60 – day forward rate P57.65 P52.30 P55.75
90 – day forward rate P54.25 P55.45 P52.10

Velocity entered into the forward contract to speculate in the foreign

currency.
In its income statement for the year ended December 31, 2022, what
amount of gain/loss should velocity report from this forward contract? gain

ILLUSTRATION 2: QC COMPANY
The following information is available with regard to QC Company's sale of
10,000 foreign currency units under a forward contract dated November 1
2030, for delivery on January 31, 2031.
Nov. 1, 2030 Dec. 31, 2030
Spot rate P8.00 P8.30
30 – day forward rate 7.80 8.20
60 – day forward rate 7.90 8.10

QC Company entered into the forward contract in order to speculate in the

foreign currency.

In QC Company’s income statement for the year ended December 31,

2030, what amount of gain or loss should be reported from this forward
contract? loss

FIRM COMMITMENT
ILLUSTRATION 1:
On November 1, 2030, Marie Co. entered into a firm commitment with Toki-
Toki Japanese Company for the export of dried mangoes with a contract
price of 10,000 Yen. The goods will be delivered by Marie Co. on January
30 2031. On the same day, in order to protect itself from the risk of changes
in fair value of the firm commitment due to changes in underlying foreign
currency, Marie Co. entered into a forward contract BDO for the sale of
10,000 Yen at the forward rate on November 1, 2030 . PAS 39 provides
that hedge of the foreign currency risk of a firm commitment may be
accounted for as either fair value hedge or cash flow hedge. Marie Co.
elected to account for the hedge of the firm commitment using fair value
hedge. The following direct exchange rate are provided.
Nov. 1, 2030 Dec. 31, 2030 Jan. 30, 2031

Buying spot rate P10 P13 P12

Selling spot rate P13 P15 P16
Forward buying 90 – days P11 P14 P15
Forward selling 90 – days P13 P16 P17
Forward buying 60 – days P14 P17 P16
Forward selling 60 – days P15 P18 P14
Forward buying 30 – days P11 P15 P12
Forward selling 30 – days P13 P11 P14

Req. 1: What is the foreign currency gain/ (loss) due to hedged item for the
year ended December 31, 2030

gain
Req. 2: What is the foreign currency gain/ (loss) due to hedging instrument
for the year ended December 31, 2031 respectively in Profit or Loss?
gain
Req. 3: Assuming Marie opted to use cash flow hedge to account for the
hedge of the firm commitment, what is the amount of sale to be recorded in
January 30, 2131?

Req. 4: Assuming Marie opted to use cash flow hedge to account for the
hedge of the firm commitment, what is the other comprehensive income
due to hedge item for the year-ended December 31, 2030?
No entry will be recorded zero
ILLUSTRATION 2: STRIKE CO.
On November 1, 2022, Strike Company entered into a firm commitment to
acquire a machinery from Spain Company. Delivery and passage of title
would be on February 28, 2023 at the price of 37,800 euros, accounted for
as fair value hedge. On the same date, to hedge against unfavorable
changes in the exchange rate, strike entered into a 120-day forward
contract with China bank for 37,800 euros.
Spot rate Forward rate
Dec. 1, 2022 P96.50 P94.30
Dec. 31, 2022 97.25 96.50
Feb. 28, 2023 99.70 99.70
Exchange rate were as follows:

Req. 1: What amount will affect profit or loss regarding the derivative asset
on the financial statement date on 2022?
Gain
Req. 2: The firm commitment account balance as shown in the December
31, 2022 statement of financial position amounted to; [indicate whether
asset or liability].

ILLUSTRATION 3: NAGA CO.

On November 1, Naga Company entered into a firm commitment to acquire
a machinery. Delivery and passage of title would be on February 28, 2031
at the price of $12,000 Singapore dollars. On the same date, to hedge
against unfavorable changes in the exchange rate, Naga Company entered
into a 120-day forward contract with China bank for $12,000 Singapore
dollars.
Exchange rate were as follows:
Spot rate Forward rate
Nov. 1, 2030 P36.25 P34.30
Dec. 31, 2030 37.40 36.70
Feb. 28, 2031 39.50 39.50

How much is the forex gain or loss recognized by the Naga Company
company on the firm commitment on December 31, 2030?

loss

ILLUSTRATION 4: IVAN CO.

On October 2, 2030 Ivan Inc. entered into a firm commitment with a
European company for the importation of the equipment with a contract
price of 2,000 Euro to be delivered on January 30, 2031. On October 2,
2030 in order to hedge the foreign currency risk related to this firm
commitment, Ivan entered into a forward contract with PNB for the
acquisition of 2,000 Euro at forward rate on October 2, 2030 to be delivered
on January 30, 2031. The following direct exchange rates are provided.
Nov. 1, Dec. 31, 2030 Jan. 30, 2031
2030
Buying spot rate P5 P7 P8
Selling spot rate P6 P8 P10
Forward buying 120 – days P7 P9 P12
Forward selling 120 – days P9 P10 P13
Forward buying 90 – days P8 P11 P15
Forward selling 90 – days P10 P14 P13
Forward buying 30 – days P12 P15 P11
Forward selling 30 – days P11 P12 P12

Req. 1: What is the cost/amount debited to equipment by Ivan on January

30, 2031?
Req. 2: What is the cost/amounted debited to equipment before
reclassification adjustment by Ivan on January 30, 2031 assuming there is
no firm commitment but instead only a highly probable forecast of important
of equipment, respectively?
ILLUSTRATION 4: AMBOY CO.
On December 1, 2030, Amboy Company, a Philippine firm, sold
merchandise to Boy Company of Spain for 60,000 euro. Payment is due on
February 1, 2031. Amboy entered into a forward exchange contract on
February 1, 2030, to deliver 60,000 euro on February 1, 2031 for P.97.
Amboy chose to use a foreign currency option to hedge this foreign
currency asset designated as a cash flow hedge. Relevant exchange rates
follow:
Date Spot rate Option Premium
Dec. 1, 2030 P0.97 P0.05
Dec. 31, 2030 P0.95 P0.04
Feb. 1, 2031 P0.94 P0.03

Req. 1: Compute the value of the foreign currency option at December 31,
2030.
Req. 2: Compute the value of the foreign currency option at February 1,
2031.
Req. 3: Compute the peso amount received on February 1, 2031.

Option Contract Fair Value Hedge

ILLUSTRATION 1: 5J
On October 1, 2030, 5J Inc. sold on account an inventory to a US-based
company at a price of $5,000 collectible on January 30, 2031. On
November 1, 2030, 5J purchased on account an inventory to a US-based
company at a price of $8,000 payable on March 2, 2031.
On October 1, 2030, in order to hedge the foreign currency risk related to
its foreign currency denominated account receivable, 5J acquired a 120-
day put option from RCBC to sell $5,000 at a strike price of P40 by paying
option premium of P500. On November 1, 2030, in order to hedge the
foreign currency risk related to its foreign currency denominated account
payable 5J acquired a 120-day call option from RCBC to buy $8,000 at an
option price of P41 by paying option premium of P600.
The following additional data are provided:
Year 2030 Year 2031
10/1 11/1 12/31 3/2 1/30
Buying spot rate P40 P38 P36 P37 P39
Selling spot rate P39 P41 P44 P41 P42
Fair value of put option ? ? P23,000 ? ?
Fair value of call option ? ? P25,000 ? ?

What is the net foreign currency gain or loss as a result of hedging activity
to be reported by 5J Inc. for the years ended (1) December 31, 2030 and
(2) December 31, 2031 respectively in profit or loss?
ILLUSTRATION 2: HUNT
On October 1, 2022, Hunt Philippines took delivery from Thailand firm of
inventory costing 1,140,000 baht. Payment is due on January 30, 2023.
Concurrently, Hunt Philippines paid P15,700 cash to acquire an at the-
money call option for 1,140,00 baht. Strike price P12.40
10/1/2022 12/31/2022 1/30/2023
Market price P12.40 P12.423 P12.427
Fair value of call option ? P28,200 P30,780

Req. 1: The foreign exchange gain/loss on hedging instrument fur to

change in the ineffective portion on December 31, 2022:
Req. 2: The foreign exchange gain/loss on hedging instrument fur to
change in the effective portion on December 31, 2023:
Req. 3: The December 31, 2022 net foreign exchange gain/loss in the
hedging activity amounted to:
Req. 4: The foreign exchange gain/loss on hedging instrument in 2030 if
changes in the time value will be included from the assessment of hedge
effectiveness:
ILLUSTRATION 3: CALOOCAN
On December 1, 2022, Caloocan Corporation acquired 6,900 shares of
Eastwood Company at a cost of P42 per share. Caloocan classifies them
as available-for-sale securities. On this same date, Caloocan decides to
hedge against a possible decline in the value of the securities by
purchasing, at a cost of P17,850 an at-the-money put option to sell the
6,900 shares. The option expires on April 1, 2030. The fair values of the
investment and the options follow:
12/1/22 122/31/22 4/1/23
Eastwood Company shares
Per share P42 P39.75 P35.25
Put option (6,900 shares)
Market value P23,100 P46,575

Req. 1: The gain/loss on option contract due to change in time value on

December 31, 2022 if split accounting is used in the assessment of hedge
effectiveness should be:
Req. 2: The 2023 net gain/loss in the hedging activity amounted to:

Option Contact – Cash Flow Hedge

ILLUSTRATION 4: PALAWAN
On May 1, 2030, Palawan Co. anticipated the purchase of 70,000 units of
merchandise from a foreign vendor. The purchase would probably occur on
September 25, 2030 and require the payment of 1,250,000 foreign
currencies (FC). On May 1, 2030, the company purchased a call option to
buy 1,250,000 FC at a strike price of 1FC = P0.47. An option premium of
P14,000 was paid. Changes in the value of the option will be excluded from
the assessment of hedge effectiveness. For the year 2030, the following
rates were as follows:
May 1 May 31 June 30 September 25
Spot rate P0.45 P0.49 P0.51 P0.52
FV of call option ? P29,500 P52,000 ?

The foreign exchange gain (loss) on option contract in (1) equity and (2)
earnings on June 30:
 Hedge in net investment in foreign operation

ILLUSTRATION 5: GWA CORPORATION

GWA Corporation of Makati paid P1,128,750 for a 35% interest in KYJ
Company of Taiwan on January 1, 2022, when KYJ’s net asset totaled
375,000 NT Dollar and the exchange rate for NT Dollar was P8.60. A
summary of changes in KYJ’s net assets during 2022 is as follows:

NT Dollar Exchange Rates

Net assets, January 1 375,000 P8.60
Net income for 2022 75,000 8.55
Dividends paid for 2022 25,000 8.54
GWA Corporation anticipated a strengthening of the Philippine peso against
the NT Dollar during the last half of 2022, and it borrowed 150,000 NT
dollar from a Taiwanese bank for one year at 10% interest on July 1, 2022
to hedge its net investment in KYJ. The loan was made when the exchange
rate for NT Dollar was P8.55. The loan was denominated in NT dollar and
the current exchange rate at December 31, 2022 was P8.50.

The other comprehensive income – translation adjustment presented in

equity in 2022 as a result of hedging:

ILLUSTRATION 6: BOOM CORP

Boom Corp., a Philippine Company, expects to order goods from a foreign
supplier at a price of 200,000 Thailand baht, with deliver and payment to be
made on May 20. On January 20, Boom purchased a three month call
option on 200,000 Thailand baht and designated this option as a cash flow
hedge of a forecasted foreign currency transaction.
The following exchange rates apply:
Strike price 4.34
 Option cost 10,000
January 20 spot rate 4.34
May 20 spot rate 4.26

How much will Boom include as an option expense in net income during
the period Jan. 20 to May 20?