On December 1, 2009, a U.S.-based company entered into a three-month forward con

Question

    On December 1, 2009, a U.S.-based company entered into a three-month forward contract to purchase 1 million Mexican pesos on March 1, 2010.
The following are the purchase rates for US dollar per peso
Date                    Spot Rate           Forward Rate (March, 2010)
December 1, 2009            .088              .084
December 31, 2009         .080                  .074
March 1, 2010             .076              
The company’s borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803.

How will the U.S. company report the forward contract on its December 31, 2009, balance sheet?

Explanation / Answer

Present value of Forward Contract receivable $                    82,345 (1000000*0.084*0.9803) Market of value of Asset as on Closing date $                    80,000 1000000*0.08 Diff. (Gain on Forward Contract $                      2,345

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