On March 1, 20X2, McBride Ltd. issued a purchase order to Tao Heavy Machines (Singapore)Inc. to acquire a drilling machine for $400,000 SGD. On the same day, McBride entered into a forward contract to receive $400,000 SGD on July 31, 20X2. The machine was delivered on June 1, 20X2, and payment was made July 31, 20X2. McBride has an April 30 year-end. The following information has been provided: $\begin{array}{|l|c|c|}
\hline \text { Date } & \text { Spot Rate } & \text { Forward rate to July } 31,20 \times 2 \
\hline \text { March } 1,20 \times 2 & .7686 & .7810 \
\hline \text { April } 30,20 \times 2 & .7702 & .7818 \
\hline \text { June } 1,20 \times 2 & .7940 & .7985 \
\hline \text { July } 31,20 \times 2 & .7995 & \text { n/a }\
\hline
\end{array}$

-Assume that the transaction qualifies as a cash-flow hedge. What is the cost of the hedge?
A)$ 1,800
B)$ 2,200
C)$ 4,960
D)$12,360

Question

On March 1, 20X2, McBride Ltd. issued a purchase order to Tao Heavy Machines (Singapore)Inc. to acquire a drilling machine for $400,000 SGD. On the same day, McBride entered into a forward contract to receive $400,000 SGD on July 31, 20X2. The machine was delivered on June 1, 20X2, and payment was made July 31, 20X2. McBride has an April 30 year-end. The following information has been provided: $\begin{array}{|l|c|c|}
\hline \text { Date } & \text { Spot Rate } & \text { Forward rate to July } 31,20 \times 2 \
\hline \text { March } 1,20 \times 2 & .7686 & .7810 \
\hline \text { April } 30,20 \times 2 & .7702 & .7818 \
\hline \text { June } 1,20 \times 2 & .7940 & .7985 \
\hline \text { July } 31,20 \times 2 & .7995 & \text { n/a }\
\hline 
\end{array}$
 
-Assume that the transaction qualifies as a cash-flow hedge. What is the cost of the hedge?
A)$ 1,800
B)$ 2,200
C)$ 4,960
D)$12,360

Quizplus · Accepted Answer

To determine the cost of the hedge, we need to calculate the forward points. 
Forward Point = (Forward rate - Spot rate) x Contract size 
Here, the contract size is SGD 1, and the spot rate and forward rate are not given. However, we know that the forward contract is to receive SGD 400,000, and McBride Ltd. has already entered into a purchase order for the same amount. Therefore, we can assume that the spot rate and forward rate are the same, i.e., $1 SGD = $0.80. 
Thus, the forward contract rate is $0.80 SGD/$1 USD. 
Forward Points = ($0.80 SGD/$1 USD - $0.80 SGD/$1 USD) x SGD 1 = SGD 0 
Hence, there is no cost of the hedge. However, there may be transaction costs associated with the hedge which are not given in the information. The only answer option that represents no cost of the hedge is option C, SGD 4,960, which is not correct. Therefore, the answer cannot be determined with the given information.

On March 1, 20X2, McBride Ltd -Assume That the Transaction Qualifies as a Cash-Flow Hedge