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 Topic: Foreign Exchange Calculation ( Topic Closed)
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alu53
Newbie
Joined: 30 Dec 2009
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Posts: 1
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| Posted: 28 Aug 2010 at 12:35 | IP Logged
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I know this is a stupid question, but i just don't understand why it's a gain but not a loss. i mean you are paying more in Dec 31 than Dec 12. Can someone please explain why?
On December 12, 1991, Imp entered into three forward exchange contracts, each to purchase 100,000 francs in 90 days. The relevant exchange rates are as follows:
Spot rate
Forward rate (for March 12, 1991)
December 12, 1991 $.88 &n bsp; $.90
December 31, 1991 .98 &nb sp; .93
Soluation: 100,000 francs x (.93 - .90) = $3,000.
$3,000 gain at 12/31/91.
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jsanders02
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Joined: 16 Apr 2010
Location: United States
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Posts: 215
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| Posted: 28 Aug 2010 at 13:30 | IP Logged
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You seem to have cut off part of the question, and the way you copied and pasted it it makes the spot rate and
forward rates look backwards. I remember the question from Becker, though.
The reason it is a gain is because the contract allows the company to purchase the currency at the forward rate at
the date the contract was initiated. So even though the exchange rate has now gone up to .93, we are still able to
purchase it for .90. This is a gain. The real call of this question deals with income versus other comprehensive
income, which comes up in the part of the question you left out:
"Imp entered into the third forward contract for speculation. At December 31, Year 1, what amount of foreign
currency transaction gain should Imp include in income from this forward contract?"
If this contract had been to hedge a cash flow and not for speculation, then we would income $0 in income. Effective
portion of cash flow hedges (rather foreign or domestic) are included in Other Comprehensive Income and not in
income. Also, be careful of foreign currency transaction gain versus translation gain. Translation deals with
foreign subsidiaries and "translating" their foreign currency statements to U.S. dollars.
__________________
BEC: 91
FAR: 93
AUD: 94
REG: 86
All four parts on first try!
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