Scenario
Penman Chemical Supply (PCS), a U.S. company, regularly buys chemicals from a Swiss supplier, and the invoice price is in Swiss francs. PCS has experienced several foreign exchange losses in the past year due to currency fluctuations. To address this issue, PCS’s CEO has asked you to investigate the possibility of using derivative financial instruments, specifically foreign currency forward contracts and foreign currency options, to hedge the company’s exposure to foreign exchange risk, and to recommend the type of hedging instruments the company should employ. PCS is also considering the purchase of the foreign supplier, and the CEO wants to know the potential implications for financial statement consolidation, including how the two-transactions perspective works in the circumstance in which the supplier is 100% acquired.
Directions
Write a memo to PCS’s CEO addressing their concerns.
Specifically, you must address the following rubric criteria:
Describe the use of derivative financial instruments. Include the following:
Foreign currency forward contracts
Explain how financial instruments are used to hedge risk exposure.
Analyze how foreign transactions impact the financial statements if the supplier is not acquired.
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Formatting
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Citation
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