How should discounts or premiums on forward contracts be treated if the derivative is hedging a foreign-currency-denominated asset?
A) Carried on the balance sheet until the contract is completed
B) Included in income in the period the derivative is acquired
C) Amortized over the life of the forward contract
D) None of the above

Question

Quizplus · Accepted Answer

Discounts or premiums on forward contracts that are used to hedge foreign-currency-denominated assets should be amortized over the life of the contract. This is because the discount or premium represents an adjustment to the cost of the asset being hedged, and therefore affects the overall cost basis over the life of the contract. The other options are not correct as simply carrying the discount or premium on the balance sheet or including it in income in the period of acquisition would not properly reflect the effect on the cost basis of the hedged asset.

How Should Discounts or Premiums on Forward Contracts Be Treated