Reference no: EM131705349

Question: Portofino Company

Portofino Company made purchases on account from three foreign suppliers on December 15, 2009, with payment made on January 15, 2010. Information related to these purchases is as follows:

Supplier                                       Location                                                Invoice Price

Beija Flor Ltda.                       Sao Paulo, Brazil                              55,000 Brazilian reals

Quetzala SA                           Guatemala City, Guatemala                255,000 Guatemalan quetzals

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

Portofino Company's fiscal year ends December 31.

Required: 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, 2009, to January 15, 2010.

2. Determine the foreign exchange gains and losses that Portofino would have recognized in net income in 2009 and 2010, 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, 2009, 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, 2009, and would have cost $200. Determine for which hedges, if any, Portofino would have recognized a net gain on the foreign currency option.