# Derivatives Essay

798 Words Apr 10th, 2015 4 Pages
Problem 1 – Comprehensive Forward Contract Problem
On December 1, 2013, Stark Industries entered into a 120-day forward contract to purchase 100,000 Australian dollars (A\$). Stark Industries’ fiscal year ends on December 31. The direct exchange rates follow: Date | Spot Rate | Forward Rate for March 31, 2014 | December 1, 2013 | \$ 0.600 | 0.609 | December 31, 2013 | 0.610 | 0.612 | January 30, 2014 | 0.608 | 0.605 | March 31, 2014 | 0.602 | |

Instructions
Prepare all journal entries for Stark Industries for the following independent situations: a. The forward contract was to manage the foreign currency risk from the purchase of furniture for A\$ 100,000 on December 1, 2013, with payment due on March 31, 2014. The forward
Instruction
Prepare all necessary journal entries for Peny One Inc. to record futures transaction until March 31, 2014.

Problem 3 – Swap
On June 30, 2013, Bechtel Inc. borrows \$ 5,000,000 of three year, variable-rate debt with interest payment equal to the six-month US \$ LIBOR (London Interbank Offered Rate) for the prior six months. The company then enters into a three-year interest-rate swap with KeyBank to convert the debt’s variable rate to a fixed rate. The swap agreement specifies that Bechtel will pay interest at a fixed rate of 7.5 percent and receive interest at a variable rate equal to the six-month US \$ LIBOR rate based on the notional amount of \$ 5,000,000/ Both the debt and the swap require interest to be paid semiannually on June 30 and December 31. Bechtel specifies the swap as a cash flow hedge.
The six-month US \$ LIBOR rate and the market value of the swap agreement, as determined by a swap broker, follow for the first year of the swap agreement: Date | Six-Month US\$ LIBOR Rate | Swap Agreement Fair Value Asset (Liability) | June 30, 2013 | 6.0 % | 0 | December 31, 2013 | 7.0% | \$ 165,000 | June 30, 2014 | 5.5% | (\$ 70,000) |

Instruction
Prepare all necessary journal entries for Bechtel to record swap transaction until June 30, 2014.

Problem 4– Option

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