Fair value hedge - firms commitment

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December 22, 2018 at 2:19 pm #492503
aarina
- Topics: 71
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Hi Chris,

Im referring to Kaplan SBR textbook page 296 the answer to Q18.

The question says that :
– the derivative instrument has risen from $0 in 1/10/x1 to $95K in 31/12/x1
– hedging item, firms commitment has fallen, cost $1m at 1/10/x1 to $1.1m at 31/12/x1

I wanted to know why would they address it as “fallen” when the purchase cost has increased?
Why would the firm commitment a fallen? i literally dont get this.

Thanks
December 22, 2018 at 3:06 pm #492507
aarina
- Topics: 71
- Replies: 145
The Q is on page 273.

wanted to know since the risk is on fx rate fluctuations and they are going to buy and so they are afraid of fx rate decrease right (purchase get more expensive, foreign currency devalue)?

does the purchase of the asset at that cost CU2m at 1/10 will still be CU2m at 31/12?
because if i did that than fx rate at end and start will differ

fx 1/10: CU2/$1 (given in Q)
fx 31/12: CU1.818/$1 ( my otherwise flawed assumption that fx decrease)

Please explain why they have given the spot rate?
December 22, 2018 at 5:38 pm #492517
aarina
- Topics: 71
- Replies: 145
what does it mean when it says “recycling of losses held within equity” – against the carrying amount of the plant?
December 24, 2018 at 10:02 pm #492648
P2-D2
Keymaster
- Topics: 4
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@aarina said:
Hi Chris,

Im referring to Kaplan SBR textbook page 296 the answer to Q18.

The question says that :
– the derivative instrument has risen from $0 in 1/10/x1 to $95K in 31/12/x1
– hedging item, firms commitment has fallen, cost $1m at 1/10/x1 to $1.1m at 31/12/x1

I wanted to know why would they address it as “fallen” when the purchase cost has increased?
Why would the firm commitment a fallen? i literally dont get this.

Thanks

Hi,

I’m not too sure as to why they’ve said this. If they are purchasing the goods then the cost has risen. It all seems a bit odd.

Thanks
December 24, 2018 at 10:04 pm #492649
P2-D2
Keymaster
- Topics: 4
- Replies: 6227
@aarina said:
The Q is on page 273.

wanted to know since the risk is on fx rate fluctuations and they are going to buy and so they are afraid of fx rate decrease right (purchase get more expensive, foreign currency devalue)?

does the purchase of the asset at that cost CU2m at 1/10 will still be CU2m at 31/12?
because if i did that than fx rate at end and start will differ

fx 1/10: CU2/$1 (given in Q)
fx 31/12: CU1.818/$1 ( my otherwise flawed assumption that fx decrease)

Please explain why they have given the spot rate?

Hi,

We are given the spot rate so that we can work out the purchase price at the date the contract was entered into and then compare it to the price at the reporting date. The price in CU stays the same but we need to convert back to $ to look at the movement in price.

Thanks
December 24, 2018 at 10:05 pm #492650
P2-D2
Keymaster
- Topics: 4
- Replies: 6227
@aarina said:
what does it mean when it says “recycling of losses held within equity” – against the carrying amount of the plant?

Hi,

The losses are take out of where they are currently held and taken to the value of the asset and not to retained earnings or profit or loss.

Thanks
December 25, 2018 at 8:08 am #492661
aarina
- Topics: 71
- Replies: 145
Thank you and merry xmas!!
December 26, 2018 at 10:05 pm #495778
P2-D2
Keymaster
- Topics: 4
- Replies: 6227
Merry Xmas to you too!
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