Question :

Zorba Company, A us based importer of field olive oil, placed an order with an overseas supplier for 500 cases of olive oilat a price of 100 crowns per case. The net purchase price is 50,000 crowns.

Relevant exchange rates are as given: Call Option Premium Forward Rate for 31^st January, Yr 2 Date Spot Rate to Jan. 31 yr 2 strike price $1.00 Dec. 1 Year 1 $1.00 $1.08 $0.04 Dec. 31 Year 1 $1.10 $1.12 $0.12 Jan. 31 Year 2 $1.15 $1.15 $0.15 Zorba Co. has an incremental borrowing rate of 12 percent (1% per month) and closes the books and prepares financial statements on Dec. 31.

1. Suppose the Olive oil was received on Dec 1, Year 1 and payment was made on Jan 31 Year 2. There was no attempt to hedge the exposure to foreign exchange risk. Purpose journal entries to account for this import purchase

2. Consider the olive oil was received on Dec 1 Year 1 and payment was made on October 31^st January, Year 2. On Dec. 1, Zorba Co entered into a two month forward contract to buy 50,000 crowns. The forward contract is correctly designated as a fair value hedge of a foreign currency payable. Purpose journal entries to account for the import purchase and forign currency forward contract.

3. The olive oil was ordered on 1^st December, Year 1. It was received and paid for on 31^st January, Year 1. On December 1, Zorba Company entered into a two-month forward contract to buy 50,000 crowns. The forward contract is correctly designated as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is calculated through reference to changes in the forward rate. Purpose journal entries to account for the foreign currency forward contract, import purchase and firm commitment.

4. The olive oil was received on 1^st December, Year 1, and payment was made on 31^st January, Year 2. On December 1, Zorba Company purchased a two-month call option for 50,000 crowns. The option was properly designated as a cash flow hedge of a foreign currency payable. Prepare journal entries to account for the import purchase and foreign currency option.

5. The olive oil was ordered on 1^st December, Year 1. It was received and paid for on 31^st December, Year 2. On December 1, Zorba Company brought a two-month call option for 50,000 crowns. The option was properly designated as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is calculated through reference to changes in the spot rate. Purpose journal entries to account for the foreign currency option, import purchase and firm commitment.