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 Summary

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