Answer:
Global
a) General Journal
1. Purchase of automobiles
Date Description Debit Credit
Nov. 12 Automobiles $2,572,000
Accounts Payable (Stockholm Motors) $2,572,000
To record the purchase of automobiles at $0.1286 per krona, terms n/60.
Date Description Debit Credit
Dec. 31: Foreign Exchange Loss/Gain $4,000
Accounts Payable (Stockholm Motors) $4,000
To recognize the current exchange rate at $0.1288 per krona.
Date Description Debit Credit
Jan. 11: Accounts Payable (Stockholm Motors) $2,566,800
Foreign Exchange Gain $9,200
Cash Account $2,557,600
To record full settlement of account.
b) Computation of the exchange rate of the krona in U.S. dollars on January 11:
Exchange rate = $2,566,800/ Sk20,000,000 = $0.12834
c) A hedging technique that Global might have used to protect itself from the possibility of losses resulting from a significant increase in the exchange rate for the krona is to buy an options or forwards contract in an underlying asset in Sweden equivalent to Sk20,000,000.
Explanation:
According to investopedia.com, "Hedging is a risk management strategy employed to offset losses in investments by taking an opposite position in a related asset." A hedged asset can also reduce potential profits. If Global had hedged the liability to Stockholm Motors, it would not have profited from the resulting gain it obtained at the end of the transaction.
