Use the following information to answer the question(s) below.

On December 1, 2014, Thomas Company, a U.S. corporation, purchases inventory from a vendor in Italy for 400,000 euros. Payment is due in 90 days. To hedge the transaction, Thomas signs a forward contract to buy 400,000 euros in 90 days at $1.3670. Thomas uses a discount rate of 6% (present value factor for 30 days = .9950; 60 days = .9901; 90 days = .9851). Assume the forward contract will be settled net and this is a cash flow hedge. Currency exchange rates are shown below:

-What is the fair value of the forward contract at December 31,2014?
A)$400.00 liability
B)$400.00 asset
C)$396.04 liability
D)$396.04 asset

Question

Use the following information to answer the question(s) below.

On December 1, 2014, Thomas Company, a U.S. corporation, purchases inventory from a vendor in Italy for 400,000 euros. Payment is due in 90 days. To hedge the transaction, Thomas signs a forward contract to buy 400,000 euros in 90 days at $1.3670. Thomas uses a discount rate of 6% (present value factor for 30 days = .9950; 60 days = .9901; 90 days = .9851). Assume the forward contract will be settled net and this is a cash flow hedge. Currency exchange rates are shown below:

-What is the fair value of the forward contract at December 31,2014?
A)$400.00 liability 
B)$400.00 asset 
C)$396.04 liability 
D)$396.04 asset

Quizplus · Accepted Answer

The fair value of the forward contract is the difference between the forward price and the spot price at the end of the accounting period. The forward price is $400 and the spot price is $396.04. Therefore, the fair value of the forward contract is $400 - $396.04 = $3.96. Since the forward contract is a liability, the fair value is a liability of $3.96.

Use the Following Information to Answer the Question(s) Below