On May 1,2011,Listing Corporation receives inventory items from their Bulgarian supplier.At the same time,Listing signed a forward contract to purchase 75,000 Bulgarian lev in sixty days to hedge the inventory purchase at $0.738,the 60-day forward rate.Payment for the inventory will be due in sixty days in Bulgarian lev.Assume the forward contract will be settled net and this qualifies as a fair value hedge.The related exchange rates are shown below: Assuming a present value factor of 1 for simplicity,what is the fair value of this forward contract on May 31?

Question

On May 1,2011,Listing Corporation receives inventory items from their Bulgarian supplier.At the same time,Listing signed a forward contract to purchase 75,000 Bulgarian lev in sixty days to hedge the inventory purchase at $0.738,the 60-day forward rate.Payment for the inventory will be due in sixty days in Bulgarian lev.Assume the forward contract will be settled net and this qualifies as a fair value hedge.The related exchange rates are shown below:  Assuming a present value factor of 1 for simplicity,what is the fair value of this forward contract on May 31?

Quizplus · Accepted Answer

A)
Current forward rate: 75,000 lev × $0.7400 $55,500
Contracted forward rate: 75,000 lev × $0.7380 55,350
Net change in value 150
With PV = 1,Net change = asset value

On May 1,2011,Listing Corporation Receives Inventory Items from Their Bulgarian