Simpson Sign Company based in Frostbite Falls, Minnesota has a 6-month C$100,000 contract to complete sign work in Winnipeg, Manitoba, Canada. The current spot rate is $1.02/C$ and the forward rate is $1.01/C$. Under conditions of equilibrium, management would use ________ today when preparing operating budgets.
A) $102,000
B) $101,000
C) $100,000
D) none of the above

Question

Quizplus · Accepted Answer

Under conditions of equilibrium and for the purpose of preparing operating budgets for a contract involving foreign currency, management would use the forward rate to hedge against currency fluctuation risk. Since the contract is in Canadian dollars and the forward rate is $1.01/C$, the correct amount in USD to use in the operating budgets would be 100,000 C$ * $1.01/C$ = $101,000.

Simpson Sign Company Based in Frostbite Falls, Minnesota Has a 6-Month