Assignment :Forward Contracts
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?