On November 1, 20x1 Zamfir Company, a U.S. corporation, purchased minerals from a Russian company for 2,000,000 rubles, payable in 3 months. The relevant exchange rates between the U.S. and Russian currencies are given:$\begin{array}{lll}
& \text { Spot rate } & \text { Forward rate(at February 1,20 x 2) } \
\text { November 1,20 x 1 } 1 & \$ 0.348 & \$ 0.348\
\text {December 31,20 x1 }& \$ 0.359 & \$ 0.352 \
\text { February 1. 20 x 2 } & \$ 0.344 &
\end{array}$
-If Zamfir does not attempt to hedge this transaction, what is the gain or loss that should be shown on the company's December 31, 20x1 financial statements?

Question

On November 1, 20x1 Zamfir Company, a U.S. corporation, purchased minerals from a Russian company for 2,000,000 rubles, payable in 3 months. The relevant exchange rates between the U.S. and Russian currencies are given:$\begin{array}{lll} 
& \text { Spot rate } & \text { Forward rate(at February 1,20 x 2) } \
\text { November 1,20 x 1   }  1 & \$ 0.348 & \$ 0.348\
\text {December  31,20 x1 }& \$ 0.359 & \$ 0.352 \
\text { February 1.  20 x 2   } & \$ 0.344 &
\end{array}$ 
-If Zamfir does not attempt to hedge this transaction, what is the gain or loss that should be shown on the company's December 31, 20x1 financial statements?

Quizplus · Accepted Answer

The correct answer is A because the gain or loss on the transaction should be calculated using the spot rate at the date of the transaction, which is November 1, 20x1. The spot rate on that date is $0.348, which means that the 2,000,000 rubles are worth $696,000 (2,000,000 x $0.348). The company has recorded the transaction at $696,000, but the value of the rubles has decreased to $682,000 (2,000,000 x $0.341) as of December 31, 20x1. This results in a loss of $14,000 ($696,000 - $682,000). However, the company has also recorded a gain of $6,000 on the forward contract, which results in a net loss of $8,000 ($14,000 - $6,000).

On November 1, 20x1 Zamfir Company, a U -If Zamfir Does Not Attempt to Hedge This Transaction, What