[Anonymous]

Hi everyone,

I am having a little confusion on what rates are suppose to be used when forward contracts are involved.

Most multiple choice questions gives you 2 columns of Spot Rate, and Forward Rate.

Example -> (Assuming a forward contract is entered for an obligation in Jan 30, Year 2)

Nov 1, Year 1 -> Spot rate = $.50 per euro, Forward rate for Jan 30, Year 2 = .80

Dec 31, Year 1 -> Spot rate = .60, Forward rate for Jan 30, Year 2 = .70

Jan 30, Year 2 -> Spot rate = Forward rate = 1.00

So if you were to enter into a forward contract on Nov 1, Year 1 to purchase goods in euros on Jan 30, Year 2, would you use the rate of .80 to measure the initial liability?

Then on year end of December 31, Year 1, you would re-measure it using the forward rate of .70?

When would the spot rate be used? Are there any other variety of contracts that would cause the spot rate to be used instead of the forward rate?

I am not understanding the importance of having the spot rate available.