On December 12, 20X1, Imp Co. 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
December 12, 20X1 $.88 $.90
December 31, 20X1 .98 .93
Imp entered into the second forward contract to hedge a commitment to purchase equipment being manufactured to Imp's specifications. At December 31, 20X1, what amount of net foreign currency transaction gain should Imp include in income from this forward contract?
A.
$0
B.
$3,000
C.
$5,000
D.
$10,000
The answer is A.
I figured there would be no gain because there would be a $3,000 loss (.90-.93 *100,000)= -3,000.
But the explanation stated
” The unrealized gain of $3,000 associated with the derivative (the hedging instrument) and the $3,000 unrealized loss associated with the hedged instrument (the purchase commitment) should result in a net unrealized gain/loss of $0. Thus, the net unrealized gain/loss included in income from continuing operations is $0.”
I don't see how there is a $3,000 gain that cancels out the $3,000 loss. I looked this problem up online and it seems that there is the same question with a different answer. Now I just have a headache -___-
.