Portofino Company summary

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Portofino Company made purchases on account from three foreign suppliers on December 15,2012, with payment made on January 15, 2013. Information related to these purchases is as follows: Supplier Location Invoice Price

Beija Flor Ltda. Sao Paulo – Brazil 65,000 – Brazilian reals

Quetzala SA Guatemala City, – Guatemala 250,000 – Guatemalan quetzals

Mariposa SA de CV Guadalajara, – Mexico 400,000 – Mexican pesos

Portofino Company’s fiscal year ends December 31.

1. Use historical exchange rate information available on the Internet at www.oanda.com to find interbank exchange rates between the U.S. dollar and each foreign currency for the period December 15, 2012, to January 15, 2013.

2. Determine the foreign exchange gains and losses that Portofino would have recognized in net income in 2012 and 2013, and the overall foreign exchange gain or loss for each transaction. Determine for which transaction it would have been most important for Portofino to hedge its foreign exchange risk.

3. Portofino could have acquired a one-month call option on December 15, 2012, to hedge the foreign exchange risk associated with each of the three import purchases. In each case, the option would have had an exercise price equal to the spot rate at December 15, 2012, and would have cost $200. Determine for which hedges, if any, Portofino would have recognized a net gain on the foreign currency option.


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