International Accounting: Forward Contracts

| September 28, 2018

Forward Contracts
Complete the following assignment.
Submit your responses in MSWord as one document. Label each section clearly. If
you choose to use an Excel spreadsheet for question 2, please copy and paste
your spreadsheet into your Word document. For written answers, please
make sure your responses are well written, conform to APA formatting, and have
proper citations, if needed.
1. Draft a memo to a client comparing
the advantages and disadvantages of using forward contracts and options to
hedge foreign exchange risk.
2. On December 1, 2009, a U.S.-based
company entered into a three-month forward contract to purchase 1 million
Mexican pesos on March 1, 2010.
The following are the purchase rates
for US dollar per peso

Date

Spot
Rate

Forward Rate (March, 2010)

December 1,
2009

$0.088

$0.084

December 31,
2009

$0.080

$0.074

March 1,
2010

$0.076

The company’s borrowing rate is 12
percent. The present value factor for two months at an annual interest rate of
12 percent (1 percent per month) is 0.9803.
How will the U.S. company report the
forward contract on its December 31, 2009, balance sheet?

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