[MantisAlfredo]

Hey all, getting confused on when to use what rates when compute FX gains/losses and figured someone must have a comprehensive answer. Like in the following:

The following information pertains to Flint Co.’s sale of 10,000 foreign currency units under a forward contract dated November 1, 20X1, for delivery on January 31, 20X2:

11/01/X1 12/31/X1
——– ——–
Spot rates $0.80 $0.83
30-day future rates 0.79 0.82
90-day future rates 0.78 0.81
Flint entered into the forward contract in order to speculate in the foreign currency. In Flint’s income statement for the year ended December 31, 20X1, what amount of loss should be reported from this forward contract?

I understand why you use the different forward rates, but feel like I’ve seen other scenarios where you use the Spot rate vs the forward rate, or spot rate vs spot rate. When do you use what!

[Dark Knight]

(0.82-0.78)*10,000 = Loss of $400
You just have to keep in mind the contract rate. In the given case, Flint contracted to sell 10,000 FC units @ $ 0.78 on January 31, 20X2. However, the future rates increased to $ 0.82 at the year end for 30 day future rates, i.e, January 31, 20X2. But because of the contracted rate he is liable to sell the FC units only at the contract rate, i.e., $ 0.78. Hence the loss.
Hope this helps mate.

[Author]

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