On November 1 of the current year, Patriot Inc. purchased a container of electri

Question

On November 1 of the current year, Patriot Inc. purchased a container of electrical components from its supplier in Japan. Patriot agreed to pay 15,000,000 ¥ in 90 days. The exchange rate on November 1 was $1 = 120 ¥. Patriot decided to hedge the transaction and entered into a 90 day forward contract to purchase yen at a cost of $1 = 125 ¥. The 60 day forward rate that would take Patriot to the December 31 fiscal year end was $1 = 127.50 ¥. On December 31, the spot rate was $1 = 118 ¥, and the 30-day forward rate was $1 = 122 ¥. What is the balance in the forward contract account on November 1 of the current year? (For purposes of this exercise, use a present value factor of 1.)
A) $0
B) $5,000 debit
C) $5,000 credit
D) $2,353 debit
E) $7,353 credit

Explanation / Answer

a) $0
The value of a forward contract on the day it is taken out is always $0.

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