On December 12, 2011, Car entered into three forward exchange contracts, each to purchase 100,000 Canadian dollars in 90 days. Assume a 12 percent interest rate. The relevant exchange rates are as follows:
| Spot Rate | Forward Rate (for March 12, 2012) |
December 12, 2011 | $0.88 | $0.90 |
December 31, 2011 | $0.98 | $0.93 |
1. Car entered into the first forward contract to hedge a purchase of inventory in November 2011, payable in March 2012. At December 31, 2011, what amount of foreign currency transaction gain should Car include in income from this forward contract? Explain.
2. Car entered into the second forward contract to hedge a commitment to purchase equipment being manufactured to Car’s specifications. At December 31, 2011, what amount of net gain or loss on foreign currency transactions should Car include in income from this forward contract? Explain.
3. Car entered into a third forward contract for speculation. At December 31, 2011, what amount of foreign currency transaction gain should Car include in income from this forward contract? Explain.
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