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Forward rate contract

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2006, with payment of 10 million Korean won to be received on January 15, 2007. The following exchange rates applied:

Date Spot Rate Forward Rate to Jan 15th

Dec 16/06 $.00090 $.00098
Dec 31/06 .00092 .00093
Jan 15/07 .00095 .00095

1) Assuming a forward contract was not entered into, what would be the net impact on Car Corp.'s 2006 income statement related to this transaction?

A) $ 500 (gain).
B) $ 500 (loss).
C) $ 200 (gain).
D) $ 200 (loss).
E) $ - 0 -

2) Assuming a forward contract was entered into, what would be the net impact on Car Corp.'s 2006 income statement related to this transaction? Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901.

A) $ 700 (gain).
B) $ 700 (loss).
C) $ 300 (gain).
D) $ 300 (loss).
E) $ 695.05 (gain).

Solution Preview

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2006, with payment of 10 million Korean won to be received on January 15, 2007. The following exchange rates applied:

Date             Spot Rate        Forward Rate to Jan 15th

Dec 16/06         $.00090               $.00098
Dec 31/06          .00092                .00093
Jan 15/07          .00095                .00095

1 Assuming a forward contract was not entered into, what would be the net impact on Car Corp.'s 2006 income statement related to this ...

Solution Summary

Identifies the impact of forward rate contract on income statement when a transaction involving foreign exchange takes place.

$2.19