Far-How do i know if i should use the 30 day Future Rate VS Spot Rate

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  • March 6, 2017 at 9:21 pm #1506393
    NYaccountingstudent
    Participant

    Here is a question from Ninja MCQ and even after reading the explanation i cant tell why sometimes the future rate is used and sometimes the spot rate is used

    On November 2, 20X1, Platt Co. entered into a 90-day futures contract to purchase 50,000 Swiss francs when the contract quote was $0.70. The purchase was for speculation in price movement. The following exchange rates existed during the contract period:

    30-Day Futures Spot Rate
    ————– ———
    November 2, 20X1 $.62 $.63
    December 31, 20X1 .65 .64
    January 30, 20X2 .65 .68

    What amount should Platt report as foreign currency exchange loss in its income statement for the year ended December 31, 20X1?

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  • March 6, 2017 at 9:50 pm #1506406
    Anonymous
    Inactive

    I am no fan of those foreign operations questions, or questions with derivatives. Thank God, there were none like that on my FAR exam. The rule of thumb for those is that there is no entry at the date they went into the foreign contract. You just have to record the gain or loss at the end of the year. I can't quite tell from your data if the December 31 forward rate is $0.65 or $0.64 though. If you are using a review course, you might wanna ask this on the homework help section too.

    March 7, 2017 at 1:41 am #1506577
    NYaccountingstudent
    Participant

    The answer is .64 i just dont understand why .64 was chosen and not .65

    March 7, 2017 at 2:32 am #1506588
    Namstut
    Participant

    In the futures contract you have to use the spot rate to revalue your transaction at the end of the FY, which is .64 on 12/31/20X1.

    AUD 7/6/16 Passed
    BEC 9/3/16
    FAR TBD
    REG TBD

    March 7, 2017 at 2:35 am #1506591
    Anonymous
    Inactive

    Whenever I ran into a topic like this in FAR that I didn't understand, I Youtubed/Googled it and then it made more sense. Some of the review courses do not explain things like this very well.
    I had to drag out my old textbooks from school for many topics that I'd totally forgotten about and/or never really understood well, way back when.

    March 7, 2017 at 2:39 am #1506595
    Namstut
    Participant

    I really hope I don't get any questions on financial instruments! I am planning to review it tomorrow but I won't spend much time on it. Have to get back to GOV/NFP.

    AUD 7/6/16 Passed
    BEC 9/3/16
    FAR TBD
    REG TBD

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