[Jasminekoko]

NINJA Question –

Hi everyone,

I am running into this problem that I am not familiar with. I would hope to get a better explanation from our forum friends. Thank you.

Here it is:

On September 1, 20X1, Brady Corp. entered into a foreign exchange contract for speculative purposes by purchasing 50,000 deutsche marks for delivery in 60 days. The rates to exchange $1 for 1 deutsche mark follow:

09/01/X1 09/30/X1

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Spot rate .75 .70

30-day forward rate .73 .72

60-day forward rate .74 .73

In its September 30, 20X1, income statement, what amount should Brady report as foreign exchange loss?

Incorrect A. 2,500

B. $1,500

C. $1,000

D. $500

You answered A. The correct answer is C.

Foreign currency amount at 09/01/X1 ($.74 x 50,000) $37,000

Less: Foreign currency amount at 09/30/X1 ($.72 x 50,000) 36,000

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Foreign exchange loss $ 1,000

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Note

On September 1, 20X1, the 60-day forward rate is used while the rate used on September 30, 20X1, is the 30-day rate. Since the forward contract (the derivative) is for purposes of speculation, any associated exchange gain or loss must be included in net income.