The following information pertains to questions
On July 1,2014,when the spot rate was US$1=CDN$1.1445,North Inc,based in the Alberta,ordered merchandise from an American supplier for US$600,000.Delivery was scheduled for the month of September,with payment to be made in full by December31,2014.
Once the order was placed,North entered into a forward contract with its bank to purchase US$600,000 in December at the forward rate of $1.1625CDN.The merchandise was received on October 1,2014,when the spot rate was US$1=$1.1575CDN.On October 31,the company's year-end,the spot rate was $1.1690.North purchased the U.S.dollars to pay its supplier on November 15,2014 when the spot rate was $1.1725CDN.
-What is the amount of the premium on the forward contract?

Question

Quizplus · Accepted Answer

The premium on the forward contract is the difference between the forward rate and the spot rate at the time the contract is entered into. In this case, the forward rate is $1.1625CDN and the spot rate is $1.1445CDN, so the premium is $1.1625CDN - $1.1445CDN = $0.0180CDN. The total premium on the forward contract is $0.0180CDN x $600,000 = $11,000CDN.

The Following Information Pertains to Questions