Honey Ltd, a New Zealand company, has sold US$150,000 ofproducts to the US, to receive cash exactly one month later. At thetime of sale, the spot rate of exchange is US$0.55, that is, NZ$1buys US$0.55. Honey Ltd wishes to hedge the currency riskassociated with this transaction, so on the day of the sale, thecompany buys a put option – that is, it buys the right to sellUS$150,000 at an exercise price of US$0.57 one month later. Theoption costs $3,000 in cash. The relevant information is shown inthe table below:
| spot rate | Option value |
| At the date of sale | 0.55 | $3,000 |
| One month late (i.e., at settlement) | 0.62 | |
Required:
(i) In accordance with NZ IFRS 9, show the journal entry torecord the sale and any additional journal entries that arerequired through to (and including) settlement.
(ii) What is the most that Honey Ltd can lose overall in thishedging activity (regardless of what the exchange rate is atsettlement date)? Show all workings.
