1. A U.S. company anticipates that it will sell merchandise for €100,000 at the end of August and receive payment for it at the

Question

2 years ago

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1. A U.S. company anticipates that it will sell merchandise for €100,000 at the end of August and receive payment for it at the

end of October. On May 1, when the spot rate is $1.20 and the forward rate for delivery on October 31 is $1.21, the company enters a forward contract to sell €100,000 on October 31. The forward contract qualifies as a cash flow hedge of the forecasted sale. The company sells the merchandise on August 30, when the spot rate is $1.232 and the forward rate for October 31 delivery is $1.23 and receives payment of €100,000 and closes the forward contract on October 31, when the spot rate is $1.24. The company has a December 31 year-end. What is the net exchange gain/loss for the year related to this transaction? A. $200 net gain B. $1,800 net loss C. $200 net loss D. $-0-

Business

1 answer:

mamaluj [8] · Answer 1 · 2022-10-24T14:12:54+03:00

Answer:

C. $200 net loss

Explanation:

The net loss or gain is calculated on hedging to determine whether the hedge has been beneficial for the company or not. Hedging is a process to transfer exchange rate movement risk. This is usually suitable for the companies who have receipts or payments in foreign currencies.

The hedging gain loss can be calculated as:

Forward rate at the time of contract - spot rate today

$1.21 - 1.232 = 0.0232