On 6/1/17, an American firm purchased a inventory costing 100,000 Canadian Dollars from a Canadian firm to be paid for on 8/1/17.Also on 6/1/17, the American firm entered into a forward contract to purchase 100,000 Canadian dollars for delivery on 8/1/17.The exchange rates were as follows: ?

$$\begin{array} { l r r r }
& \text { Spot } & \text { Forward } \
\hline 6 / 1 / 17 & 1 \mathrm { CD } = \$ 0.73 & 1 \mathrm { CD } = \$ 0.74 \
6 / 30 / 17 & 1 \mathrm { CD } = \$ 0.70 & 1 \mathrm { CD } = \$ 0.75 \
8 / 1 / 17 & 1 \mathrm { CD } = \$ 0.68 & 1 \mathrm { CD } = \$ 0.68
\end{array}$$ The American firm's fiscal year end is 6/30/17.The changes in the value of the forward contract should be discounted at 8%.What is the recorded value of the Forward Contract on 6/1/17?

Question

On 6/1/17, an American firm purchased a inventory costing 100,000 Canadian Dollars from a Canadian firm to be paid for on 8/1/17.Also on 6/1/17, the American firm entered into a forward contract to purchase 100,000 Canadian dollars for delivery on 8/1/17.The exchange rates were as follows: ?

$$\begin{array} { l r r r } 
& \text { Spot } & \text { Forward } \
\hline 6 / 1 / 17 & 1 \mathrm { CD } = \$ 0.73 & 1 \mathrm { CD } = \$ 0.74 \
6 / 30 / 17 & 1 \mathrm { CD } = \$ 0.70 & 1 \mathrm { CD } = \$ 0.75 \
8 / 1 / 17 & 1 \mathrm { CD } = \$ 0.68 & 1 \mathrm { CD } = \$ 0.68
\end{array}$$ The American firm's fiscal year end is 6/30/17.The changes in the value of the forward contract should be discounted at 8%.What is the recorded value of the Forward Contract on 6/1/17?

Quizplus · Accepted Answer

The forward contract is initially recorded at zero value on 6/1/17 because it is a derivative financial instrument that is recognized at fair value, which is typically zero at inception.

On 6/1/17, an American Firm Purchased a Inventory Costing 100,000