Myway Company sold equipment to a Canadian company for 100,000 Canadian dollars
ID: 2426438 • Letter: M
Question
Myway Company sold equipment to a Canadian company for 100,000 Canadian dollars (C$) on January 1, 20X9 with settlement to be in 60 days. On the same date, Myway entered into a 60-day forward contract to sell 100,000 Canadian dollars at a forward rate of 1 C$ = $.94 in order to manage its exposed foreign currency receivable. The forward contract is not designated as a hedge. The spot rates were: January 1, 1C$= $0.945, March 1, 1C$= 0.930. Based on the preceding information, had Myway not used the forward exchange contract, net income for the year would have:
increased by $1,000.
increased by $500.
decreased by $1,000.
decreased by $1,500.
A.increased by $1,000.
B.increased by $500.
C.decreased by $1,000.
D.decreased by $1,500.
Explanation / Answer
Had Myway not used the forward exchange contract, net income for the year would have decreased by $1500 (100000$ x (0.945-0.930) since Myway will be required to sell the equipment at the prevailing price on date of settlement ( i-e Mar 01 @ 0.930 $), which is less than spot rate on Jan 01.
Hence, forward contract increases the net income by $1500.
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