Amazing Corporation, a U.S. enterprise, sold product to a customer in Wales
on October 1, 20x1 for £200,000 with payment required on April 1, 20x2.
Relevant exchange rates are:
Spot rate
Forward rate (to
4/1/x2)
October 1, 20x1
$1.87
$1.85
December 31, 20x1
1.86
$1.84
April 1, 20x2
1.90
The discount factor corresponding to the company's incremental borrowing
rate for 3 months is 0.94.
Assume that Amazing Corporation enters a forward contract on October 1,
20x1 to sell £200,000 six months hence, on April 1, 20x2. How should
Amazing Corporation report the forward contract on its December 31, 20x1
financial statements?
Liability $1,880
Asset $1,880
Asset $3,880
Liability $3,880