Completed Transaction, Fair Value Hedge. On December 1, 20x5, our company sold g

Question

Completed Transaction, Fair Value Hedge. On December 1, 20x5, our company sold goods to an overseas company. Payment is due on March 1, 20x6. The selling price was 1,000,000 FC units. As protection against FC losses, on December 1, we entered into a forward contract to sell 1,000.000 FC units on March 1, 20x6. Date December 1, 20x5 December 31,20x5 March 1, 20x6 60-day forward 90-day Forward rate S1.19 $1.22 Spot rate $1.15 rate $1.21 $1.23 S1.16 $1.20 5. For the year ended December 31, 20x6, what is the income statement amount associated with the forward contract (only the contract; ignore the FC receivable)? $9,803 gain. $9,803 loss. a. b. c. d. e. $19,803 loss. $19,803 gain. None of the above. 6. For the year ended December 3 1, 20x6, the second year, what is the income statement amount associated with a. $40,000 expense/loss b. $40,000 income/gairn. c. $50,000 expense/loss. d. $50,000 income/gain. e. None of the above. sndino voting shares of S

Explanation / Answer

Answer # 1

None of the above.

The 990 days forward rate as on 1 dec 20x5 was 1.21 and spot as on that date was 1.15. This gives a diference of $ 0.06. On FC contract of $1,000,000 the gain / loss would be $ 60,000 and not 9803 or 19803.

Answer # 2

There is gain of $ 50,000. Against a conversion rate of $ 1.15 on the date of transaction, the conversion rate on the date of realisation was $ 1.20. On a FC transacstion of $ 1,000,000, the per dollar gain of 0.05 would result in total gain of $ 50,000

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