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RXN's year-end is on December 31.On November 1,2014 when the U.S.dollar was worth $1.165 CDN,RXN sold merchandise to an American client for $300,000.Full payment of this invoice was expected by January 31,2015.On December 1,the spot rate was $1.1450 CDN and the three-month forward rate was $1.1250 CDN.
In order to minimize its Foreign Exchange risk and exposure,RXN entered into a contract with its bank on December 1,2014 to deliver $300,000 U.S.in three months time.The spot rate at year-end was $1.16 CDN.On March 1,2015,RXN received the $300,000 U.S.from its client and settled its contract with the bank.
Significant dates pertaining to this transaction are as follows:
-What is the amount of the discount recorded on the contract?

Question

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RXN's year-end is on December 31.On November 1,2014 when the U.S.dollar was worth $1.165 CDN,RXN sold merchandise to an American client for $300,000.Full payment of this invoice was expected by January 31,2015.On December 1,the spot rate was $1.1450 CDN and the three-month forward rate was $1.1250 CDN.
In order to minimize its Foreign Exchange risk and exposure,RXN entered into a contract with its bank on December 1,2014 to deliver $300,000 U.S.in three months time.The spot rate at year-end was $1.16 CDN.On March 1,2015,RXN received the $300,000 U.S.from its client and settled its contract with the bank.
Significant dates pertaining to this transaction are as follows: 
-What is the amount of the discount recorded on the contract?

Quizplus · Accepted Answer

RXN entered into a forward contract with its bank to sell $300,000 U.S. in exchange for Canadian dollars in three months time. At the time of entering into the contract, the spot rate was $1.1450 and the forward rate was $1.1250. The difference between the spot rate and the forward rate is the discount or premium on the forward contract. In this case, the discount is $0.02 CDN ($1.1250 - $1.1450) per U.S. dollar. Therefore, the total discount is $6,000 CDN ($300,000 U.S. x $0.02 CDN per U.S. dollar), which is equivalent to $4,000 USD ($6,000 CDN / 1.5 exchange rate). Hence, the answer is option C.

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