On 4/1/18, a U.S.Company commits to sell a piece of equipment to a French customer.At that time, the U.S.company enters into a forward contract to sell foreign currency on 8/1/18 (120 days).Delivery will take place 7/1/18 with payment due on 8/1/18.The fiscal year end for the company is 6/30/18.The sales price of the equipment is 200,000 Euros.Various exchange rates are as follows: ?

$$\begin{array} { l r r }
& \text { Spot } & \text { Forward } \
\hline 4 / 1 / 18 & 1 \mathrm { FC } = \$ 0.60 & 1 \mathrm { FC } = \$ 0.58 \
6 / 30 / 18 \text { and } 7 / 1 / 18 & 1 \mathrm { FC } = \$ 0.58 & 1 \mathrm { FC } = \$ 0.56 \
8 / 1 / 18 & 1 \mathrm { FC } = \$ 0.55 & 1 \mathrm { FC } = \$ 0.55
\end{array}$$ Discount rate is 12%.What is the value of Forward Contract on 6/30?

Question

On 4/1/18, a U.S.Company commits to sell a piece of equipment to a French customer.At that time, the U.S.company enters into a forward contract to sell foreign currency on 8/1/18 (120 days).Delivery will take place 7/1/18 with payment due on 8/1/18.The fiscal year end for the company is 6/30/18.The sales price of the equipment is 200,000 Euros.Various exchange rates are as follows: ?

$$\begin{array} { l r r } 
& \text { Spot } & \text { Forward } \
\hline 4 / 1 / 18 & 1 \mathrm { FC } = \$ 0.60 & 1 \mathrm { FC } = \$ 0.58 \
6 / 30 / 18 \text { and } 7 / 1 / 18 & 1 \mathrm { FC } = \$ 0.58 & 1 \mathrm { FC } = \$ 0.56 \
8 / 1 / 18 & 1 \mathrm { FC } = \$ 0.55 & 1 \mathrm { FC } = \$ 0.55
\end{array}$$ Discount rate is 12%.What is the value of Forward Contract on 6/30?

Quizplus · Accepted Answer

To determine the value of the forward contract on 6/30, we need to calculate the present value of the future cash flows. The future cash flow is known - it is the sale of 200,000 Euros on 8/1/18. We can use the discount rate of 12% to determine the present value.

PV = FV / (1 + r)^n

Where PV = Present Value 
FV = Future Value 
r = Interest Rate 
n = Number of periods

In this case, n = 30/360 (the number of days between 6/30/18 and 8/1/18) 
r = 12%/360 = 0.000333 
FV = 200,000 Euros

PV = 200,000 / (1 + 0.000333)^30 = 196,040 Euros

Since the U.S. company is selling foreign currency, the value of the forward contract is a debit to the company. Therefore, the answer is B) 3,960 debit.

On 4/1/18, a U Discount Rate Is 12