Accounting for Derivative Securities
On 1/1/19 FIFO Inc., a calendar year company, is created with an equity investment of $188. On the same day the company purchases 1 share of stock in another company for $97. The 1 share of stock is classified as TRADING. On 3/31/19 the share of stock is worth $73 per share. On 6/30/19 the share of stock is worth $102 per share. On 9/30/19 the share of stock is worth $87 per share. On 12/31/19 the share of stock is worth $108 per share. The corporate tax rate is 21.00%. Quarterly revenues and expenses are provided below and are all in cash. FIFO issues financial statements quarterly.
FOR ALL ANSWERS ROUND TO TWO DECIMAL PLACES
A) Provide all journal entries and t-accounts necessary to account for this transaction on a quarterly basis (from inception of company to the end of quarter 4)
B) Create the financial statements: Income Statement, Statement of Retained Earnings and Balance Sheet, (from inception of company to the end of quarter 4)
C) Provide all journal entries and t-accounts necessary to account for this transaction on an annual basis (from inception of company to the end of the fiscal year)
D) Create the financial statements: Income Statement, Statement of Retained Earnings and Balance Sheet, (from inception of company to the end of fiscal year 1)
On 1/1/19 FIFO Inc., a calendar year company, is created with an equity investment of $191. On the same day the company purchases 1 share of stock in another company for $106. The 1 share of stock is classified as AVAILABLE FOR SALE. On 3/31/19 the share of stock is worth $88 per share. On 6/30/19 the share of stock is worth $120 per share. On 9/30/19 the share of stock is worth $95 per share. On 12/31/19 the share of stock is worth $114 per share. The corporate tax rate is 21.00%. Quarterly revenues and expenses are provided below and are all in cash. FIFO issues financial statements quarterly.
FOR ALL ANSWERS ROUND TO TWO DECIMAL PLACES
A) Provide all journal entries and t-accounts necessary to account for this transaction on a quarterly basis
(from inception of company to the end of quarter 4)
B) Create the financial statements: Income Statement, Statement of Retained Earnings and Balance Sheet, (from inception of company to the end of quarter 4)
C) Provide all journal entries and t-accounts necessary to account for this transaction on an annual basis (from inception of company to the end of the fiscal year)
D) Create the financial statements: Income Statement, Statement of Retained Earnings and Balance Sheet, (from inception of company to the end of fiscal year 1)
In early 2020, the spot exchange rate between the US dollar and the Euro was 1.855700 $/Euro. The 6-month interest rate in the US is 3.5700% and the Euro rate is 2.3400%. Based on the table below, what should the 6-month $/Euro forward rate be to prevent arbitrage opportunities? Show all calculation to 6 decimal places.
A) What should the 6-month $/Euro forward rate be to prevent arbitrage opportunities?
B) Suppose thethe6-month $/Euro forward rate is 1.871795. What arbitrage opportunities are there? Construct an arbitrage/payoff table to outline your strategy. What is the aggregate arbitrage profit that can be made (if any)?
C) Suppose thethe6-month $/Euro forward rate is 1.865367. What arbitrage opportunities are there? Construct an arbitrage/payoff table to outline your strategy. What is the aggregate arbitrage profit that can be made (if any)?
Based on the risk-free yield curve given below and assuming semi-annual compounding using a30/360 daycount convention (as used in class)calculate:
1) the discount factors (6 decimal places)
2) the zero-coupon yield curve (spot rate curve) (6 decimal places)
3) All implied forward rates contained within the yield curve (6 decimal places)
4) Suppose you are quoted a 6-month forward rate starting 6 months from today (0.5F*1.0) that is 10 basis points (0.10%) higher than the theoretical 6-month forward rate starting 6 months from today (0.5F1.0) that you calculated in part 3. Create an investment strategy using an arbitrage table, to exploit this arbitrage opportunity.
5) Suppose you are quoted a 6-month forward rate starting 6 months from today (0.5F*1.0) that is 15 basis points (0.15%) lower than the theoretical 6-month forward rate starting 6 months from today (0.5F1.0) that you calculated in part 3. Create an investment strategy using an arbitrage/payoff table, to exploit this arbitrage opportunity.
