On December 1, 20X5, Gillard Ltd. sold goods to International Traders Ltd., a company located in Switzerland, for 500,000 Swiss francs (CHF). At the date of sale, the spot rate was CHF1 = $1.0329. On the same date, Gillard acquired a 90-day forward contract at a rate of CHF1 = $1.0315. On March 1, 20X6, Gillard received full payment from International Traders and delivered the Swiss francs in execution of the forward contract. The spot rate at March 1, 20X6, was CHF1 = $1.0287. Assume that Gillard has a December 31 year-end and that the spot rate on that date was CHF1 = $1.0302. At December 31, the forward rate for a 60-day contract was CHF1 = 1.0394.
-At December 31, what is the balance of Gillard's forward contract payable?

Question

Quizplus · Accepted Answer

First, we need to calculate the amount received by Gillard on March 1, 20X6, using the spot rate on December 1, 20X5:
500,000 CHF x $1.0287/CHF = $514,350
Next, we need to calculate the amount Gillard would have received if they had not entered into the forward contract and instead used the spot rate on March 1, 20X6:
500,000 CHF x $1.0287/CHF = $514,350
The difference between these two amounts represents the gain or loss on the forward contract:
$514,350 – $500,000 x $1.0315/CHF = $14,650
Finally, we need to calculate the amount Gillard would have to pay to settle the forward contract at December 31, using the forward rate for a 60-day contract:
500,000 CHF x $1.0394/CHF = $519,700
Since this is a payable, we need to subtract this amount from the gain on the forward contract:
$14,650 - $519,700 = -$505,050 (negative means payable)
Therefore, the balance of Gillard's forward contract payable at December 31 is $515,650 (answer B).