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A U.S. exporter has a Thai baht account receivable resulting from an export sale on June...

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U.S. exporter has a Thai baht account receivable resulting from an export sale on June 1 to a customer in Thailand. The exporter signed a forward contract on June 1 to sell Thai baht and designated it as a cash flow hedge of a recognized Thai baht receivable. The spot rate was $0.022 on that date, and the forward rate was $0.021. Forward points are excluded from the assessment of hedge effectiveness. Which of the following is true with respect to the forward points on this contract? The forward points are a

Multiple Choice

  • Forward contract discount that is recognized in net income as a foreign exchange gain.

  • Forward contract premium that is recognized in net income as a foreign exchange loss.

  • Forward contract premium that is recognized in net income as a foreign exchange gain.

  • Forward contract discount that is recognized in net income as a foreign exchange loss.

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Answer #1

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Correct answer is Forward contract premium that is recognized in net income as a foreign exchange gain.

Since,Exporter has sold the forward contract it has hedge its receivable and the current spot rate is $0.022 and forward rate is $0.021 so by selling the forward we have a forward contract premium as forward rate is less than the spot rate and we were bearish so a price reduction is positive so forward premium and premium is recognised in net income as a foreign exchange gain.

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