Question

A U.S. company anticipates that it will sell merchandise for €100,000 at the end of August and receive payment for it at the end of October. On May 1, when the spot rate is $1.20 and the forward rate for delivery on October 31 is $1.21, the company enters a forward contract to sell €100,000 on October 31. The forward contract qualifies as a cash flow hedge of the forecasted sale. The company sells the merchandise on August 30, when the spot rate is $1.232 and the forward rate for October 31 delivery is $1.23 and receives payment of €100,000 and closes the forward contract on October 31, when the spot rate is $1.24. The company has a December 31 year-end.

What is the net exchange gain/loss for the year related to this transaction?

	A.	$-0-
	B.	$1,800 net loss
	C.	$200 net loss
	D.	$200 net gain

As of August 30, the effect of the above events on other comprehensive income is:

	A.	$3,200 net gain
	B.	$2,200 net gain
	C.	$2,200 net loss
	D.	$-0-

Answer 1

PART I

The net exhange gain loss for the year should be difference of forward rate at the time the contract was entered on 1st May and spot rate at the time of settlement on 31 October which makes 0.03 (1.21-1.24) multiplied with EUR 100,000 to make -.03*100,000 accounting to net loss of $ 3000, but since it is not amonst option therefore would advise to cross check.

PART II

Comprehensive income on 30th August is unrealized income/loss due to this transaction as of that day and forward contract rate being $1.21 making settlement as 121,000 (EUR 100,000 * 1.21) on 31st October, and spot rate as of August 30 being 1.232 making unrealized settlement as of that day as 123,200 (EUR 100,000 * 1.232). Thus comprehensive income as of August 30 is 121,000-123,200=-2200, accounting to loss of 2200. Therefore option C is correct.