Question
On December 1, 2014, Thomas Company, a U.S. corporation, purchases inventory from a vendor in Italy for 400,000 euros. Payment is due in 90 days.
On December 1, 2014, Thomas Company, a U.S. corporation, purchases inventory from a vendor in Italy for 400,000 euros. Payment is due in 90 days. To hedge the transaction, Thomas signs a forward contract to buy 400,000 euros in 90 days at $1.3670. Thomas uses a discount rate of 6% (present value factor for 30 days = .9950; 60 days = .9901; 90 days = .9851). Assume the forward contract will be settled net and this is a cash flow hedge. Currency exchange rates are shown below:
Date Spot rate Forward rate to March1
December 1,2014 $1.3694 $1.3670
December 31, 2014 $1.3642 $.3660
January 30,2015 $1.3670 $1.3690
March 1,2015 $1.3712 $1.3712
What is the fair value of the forward contract at March 1
$1,654.97 asset
$1,654.97 liability
$1,680 asset
$-0-
What is the fair value of the forward contract at December 31, 2014?
$396.04 liability
$396.04 asset
$400.00 asset
$400.00 liability
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