Belsen purchased inventory on December 1, 2009. Payment of 200,000 stickles was

Question

Belsen purchased inventory on December 1, 2009.
Payment of 200,000 stickles was to be made in sixty
days. Also on December 1, Belsen signed a contract to
purchase §200,000 in sixty days.

The spot rate was $1 = §2.80, and the 60-day forward
rate was $1 = §2.60. On December 31, the spot rate was
$1 = §2.90 and the 30-day forward rate was $1 = §2.62.

Assume an annual interest rate of 12% and a fair value
hedge. The present value for one month at 12% is .9901.

What will be the book value of the Forward Contract on
December 31?

Explanation / Answer

Cost of current forward contract = 200,000/2.62 = $76,336

Cost of § at contracted rate = 200,000/2.60 = $76,923

Value of forward contract = $ 76,923 - $ 76,336 = $ 587

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