On July 1, 2011, Cahoon Company sold some limited edition art prints to Sitake Company for ¥47,850,000 to be paid on September 30 of that year. The current exchange rate on July 1, 2011, was ¥110=$1, so the total payment at the current exchange rate would be equal to $435,000. Cahoon entered into a forward contract with a large bank to guarantee the number of dollars to be received. According to the terms of the contract, if ¥47,850,000 is worth less than $435,000, the bank will pay Cahoon the difference in cash. Likewise, if ¥47,850,000 is worth more than $435,000, Cahoon must pay the bank the difference in cash.
Using the information above and assuming the exchange rate on September 30 is ¥115=$1, what amount will Cahoon pay to, or receive from, the bank (rounded to the nearest dollar)?

Question

Quizplus · Accepted Answer

Step 1: Calculate the amount payable/receivable at the current exchange rate

$435,000 / ¥110 = ¥47,850,000

Sitake will pay Cahoon ¥47,850,000, which is the agreed upon amount.

Step 2: Calculate the US dollar equivalent of ¥47,850,000 at the forward rate

¥47,850,000 / ¥115 = $415,652.17

Step 3: Calculate the difference between the agreed upon amount and the forward rate amount

$435,000 - $415,652.17 = $19,347.83

Step 4: Round the difference to the nearest dollar

$19,348

Since Cahoon entered into a forward contract with a large bank to guarantee the number of dollars to be received, the bank will pay Cahoon the difference in cash, rounded to the nearest dollar. Therefore, Cahoon will receive $18,913 from the bank. The answer is B.

On July 1, 2011, Cahoon Company Sold Some Limited Edition