Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2011, with payment of 10 million Korean won to be received on January 15, 2012. The following exchange rates applied: $\begin{array}{lrr}& & \text { Forward } \
& \text { Sot } & \text { Rate } \
\text { Date } & \text { Rate } & \text { to Jan.15 }\
\text { December 16, 2011 } & \$ .00092 & \$ .00098 \
\text { December 31,2011 } & .00090 & .00093 \
\text { January } 15,2012 & .00095 & .00095
\end{array}$
-Assuming a forward contract was entered into, at what amount should the forward contract be recorded at December 31, 2011? Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901.

Question

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2011, with payment of 10 million Korean won to be received on January 15, 2012. The following exchange rates applied: $\begin{array}{lrr}& & \text { Forward } \
 & \text { Sot } & \text { Rate } \
\text { Date } & \text { Rate } & \text { to Jan.15 }\
\text { December 16, 2011 } & \$ .00092 & \$ .00098 \
\text { December 31,2011 } & .00090 & .00093 \
\text { January } 15,2012 & .00095 & .00095
\end{array}$
-Assuming a forward contract was entered into, at what amount should the forward contract be recorded at December 31, 2011? Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901.

Quizplus · Accepted Answer

The forward contract should be recorded at the difference between the forward rate on December 16 and the forward rate on December 31, discounted to present value. The difference is $ (0.00098 - 0.00093) \times 10,000,000 = 500 $. Discounting this amount by the present value factor for one month at 12% gives $ 500 \times 0.9901 = 495 $.

Car Corp (A U -Assuming a Forward Contract Was Entered Into, at What Amount