On November 1, 20x1 Zamfir Company, a U.S. corporation, purchased minerals from a Russian company for 2,000,000 rubles, payable in 3 months. The relevant exchange rates between the U.S. and Russian currencies are given:$\begin{array}{lll}
& \text { Spot rate } & \text { Forward rate(at February 1,20 x 2) } \
\text { November 1,20 x 1 } 1 & \$ 0.348 & \$ 0.348\
\text {December 31,20 x1 }& \$ 0.359 & \$ 0.352 \
\text { February 1. 20 x 2 } & \$ 0.344 &
\end{array}$
-Assume that on November 1, 20x1 Zamfir Company enters a forward contract to buy 2,000,000 rubles on February 1, 20x2.What is the fair value of the forward contract on December 31, 20x1?
A)$8,000
B)$7,800
C)$22,000
D)$8,200

Question

On November 1, 20x1 Zamfir Company, a U.S. corporation, purchased minerals from a Russian company for 2,000,000 rubles, payable in 3 months. The relevant exchange rates between the U.S. and Russian currencies are given:$\begin{array}{lll} 
& \text { Spot rate } & \text { Forward rate(at February 1,20 x 2) } \
\text { November 1,20 x 1   }  1 & \$ 0.348 & \$ 0.348\
\text {December  31,20 x1 }& \$ 0.359 & \$ 0.352 \
\text { February 1.  20 x 2   } & \$ 0.344 &
\end{array}$ 
-Assume that on November 1, 20x1 Zamfir Company enters a forward contract to buy 2,000,000 rubles on February 1, 20x2.What is the fair value of the forward contract on December 31, 20x1?
A)$8,000
B)$7,800
C)$22,000
D)$8,200

Quizplus · Accepted Answer

The fair value of the forward contract on December 31, 20x1, is calculated based on the difference between the forward rate at the time of entering the contract and the forward rate at December 31, 20x1, multiplied by the amount of the currency. The forward rate on November 1, 20x1, for February 1, 20x2, is $0.348, and the forward rate on December 31, 20x1, for February 1, 20x2, is $0.352. The difference is $0.004. Therefore, the fair value is 2,000,000 rubles * $0.004 = $8,000. However, the correct calculation should consider the direction of the contract (buying rubles), and the increase in the forward rate indicates a loss for the company holding the contract to buy at a now higher rate. The mistake in the calculation or the misinterpretation of the direction of the contract value change could lead to confusion. The correct answer should reflect the value change based on the contract specifics and the correct application of the exchange rate difference, but given the options and the calculation provided, the closest correct option based on the initial calculation would be $8,000, which is mistakenly not aligned with the correct interpretation of the forward contract's fair value change. The correct process involves calculating the difference in value due to the change in forward rates, but the provided answer options and explanation indicate a misunderstanding or misapplication of the financial principles involved.

On November 1, 20x1 Zamfir Company, a U -Assume That on November 1, 20x1 Zamfir Company Enters a Minerals