Question

On December 15, 2018, a US company imported 400,000 barrels of oil from a country in the Europe. The US company agreed to pay 40,000,000 euros on February 15, 2019. To reduce the risk of loss due to exchange rates, the company entered into a forward contract to buy 40,000,000 euros on February 15 at the forward rate of $.0269. Direct exchange rates on various dates were:

                                         Spot Rate          Forward Rate 2/15 Delivery

December 15, 2018        $.0239 $.0269

December 31, 2018 .0224             .0254

February 15, 2019                                   .0291

The US company is a calendar-year company.
(show calculations)
Compute the following:

1. The dollars to be paid on February 15, 2019, to acquire the 40,000,000 euros from the exchange dealer.

2. The dollars that would have been paid to settle the account payable had the US company not hedged the purchased contract with the forward contract.

3. The discount or premium on the forward contract.

4. The transaction gain or loss on the exposed liability related to the oil purchase in 2018 and 2019. 5. The transaction gain or loss on the forward contract in 2018 and 2019.

Answer 1