Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2011, with payment of 10 million Korean won to be received on January 15, 2012. The following exchange rates applied:

Assuming a forward contract was entered into, at what amount should the forward contract be recorded at December 31, 2011? Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901.

A) $200.
B) $295.
C) $495.
D) $500.
E) $9,300.

Question

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2011, with payment of 10 million Korean won to be received on January 15, 2012. The following exchange rates applied:

Assuming a forward contract was entered into, at what amount should the forward contract be recorded at December 31, 2011? Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901.

A) $200. 
B) $295. 
C) $495. 
D) $500. 
E) $9,300.

Quizplus · Accepted Answer

To calculate the amount to be recorded for the forward contract at December 31, 2011, we need to first calculate the present value of the Korean won payment using the given interest rate and present value factor.

Present value of Korean won payment = 10,000,000 / 1110.35 = 9008.71

Next, we need to calculate the fair value of the forward contract. Since this is a fair value hedge, any changes in the fair value of the forward contract will offset changes in the value of the Korean won payment. Therefore, the fair value of the forward contract should be equal to the present value of the Korean won payment.

Fair value of forward contract = 9008.71

Therefore, the correct answer is C.

Car Corp (A U