Question

Use the information on the U.S. dollar value of the pound sterling to answer the following question(s).

	Spot Rate	Forward Rate for August 16, 2020 Delivery
May 16, 2020	$1.380	$1.375
June 30, 2020	1.390	1.388
August 16, 2020	1.400	1.400

On May 16, 2020, a U.S. company takes delivery of £100,000 in merchandise from a U.K. supplier. The company will pay the supplier £100,000 on August 16. On May 16, the company also enters a forward contract to buy £100,000 on August 16, 2020. On August 16, the company purchases £100,000 using the forward contract, and pays the supplier. The company's accounting year ends June 30, and it sells the merchandise in September 2020.

What is the net effect on fiscal 2020 income of exchange rate changes due to the purchase and the forward contract?

	A.	$300 net loss
	B.	$2,300 net loss
	C.	$300 net gain
	D.	no effect

Answer 1

If no Forward Cotract has been taken by the company

Outflow of funds = £100,000 * $1.400 = $140,000

Here, Company has to by £100,000 at Spot Rate of $1.400 on August,16 2020.

If Forward Cotract has been taken by the company

Outflow of funds = £100,000 * $1.400 = $140,000

Here, Company has to by £100,000 at Forward Rate of $1.400 on August,16 2020.

Comment: In both cases, Outflow of funds remains same because spot rate and forward rate are same on August 16, 2020. So there is no effect on income due to forward contract.