[strugglebus91]

Can someone explain to me this: If a seller enters a Forward Contract and agrees to sell 100,000 euros at a forward rate of $1.25 per 1 Euro, but come the Settlement Date the rate drops to $1.19 per 1 Euro. Why are we recognizing a Gain?? To me, if you agree to selling something at a certain price, but the rate ends up dropping lower than what you agreed to sell for, that should be a loss right?

Like, if I agreed to sell my phone for $5, but I actually ended up selling it for $4, wouldn’t that be a loss?! Am I going crazy?

I might’ve just realized it might a gain because you’re selling EUROS so from that perspective it could be a gain because the dollar is evening out in value with the euros?

Aud - 61
Bus - (5/2)
Reg
Far

[Anonymous]

With the example you gave, i.e., selling your phone for $5 via a forward contract, let’s say on 1/31. However, on the agreed date, the price of the phone drops to $4, I’d owe you a $1, which is your gain. It’s either you sell me your phone and I pay you $5 or I pay you a $1 and you can keep your phone. Thus the contract is closed.

[Anonymous]

Good example you use there…. Thankfully, they usually don't get much more complex than this on the exam. Hedging/options contract accounting in foreign currencies especially, is a bitch of a topic. I don't think I will ever fully understand some of the entries for fair value vs cash flow hedge and why gains/losses are sometimes recognized only in Accum Other Comprehensive Income. That's always the risk of those kinds of contracts though – if you make a contract to buy foreign currency or exchange it for X dollars and then the rate drops on the settlement date, you're ska-roooooed! lol

[Author]

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