3.1. Foreign Currency Forward Contracts

(2 points per answer; 5 points for formatting; 17 points total)

On November 1, 2013, Jagged Company sold inventory to a company in England. The sale was for 600,000 British pounds and

payment will be received on February 1, 2014. On November 1, Jagged entered into a forward contract to sell 600,000 British pounds

on February 1 at the forward rate of $1.65. Spot rates for the British pound are as follows:

November 1 $1.61

December 31 1.67

February 1 1.62

Jagged has a December 31 fiscal year-end.

Required:

Compute each of the following:

1. The dollars to be received on February 1, 2014, from selling the 600,000 pounds to the exchange dealer.

2. The dollars that would have been received from the account receivable if Jagged had not hedged the sale contract with the forward

contract.

3. The gain or loss created by the premium on the forward contract.

4. The transaction gain or loss on the exposed asset related to the sale in 2013 and 2014.

5. The transaction gain or loss on the forward contract in 2013 and 2014.