On October 1, 2020, Mertag Company (a U.S.-based company) receives an order from a customer in Poland to deliver goods on January 31, 2021, for a price of 1,030,000 Polish zlotys (PLN). Mertag enters into a forward contract on October 1, 2020, to sell PLN 1,030,000 in four months (on January 31, 2021). U.S. dollar–Polish zloty exchange rates are as follows: Date Spot Rate Forward Rate (to January 31, 2021) October 1, 2020 $ 0.26 $ 0.30 December 31, 2020 0.29 0.33 January 31, 2021 0.31 N/A Mertag designates the forward contract as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the forward rate, and, therefore, forward points are included in assessing hedge effectiveness. Mertag must close its books and prepare financial statements on December 31. Discounting to present value can be ignored. Determine the net benefit, if any, realized by Mertag from entering into the forward contract.
On October 1, 2020, Mertag Company (a U.S.-based company) receives an order from a customer in Poland to deliver goods on January 31, 2021, for a price of 1,030,000 Polish zlotys (PLN). Mertag enters into a forward contract on October 1, 2020, to sell PLN 1,030,000 in four months (on January 31, 2021). U.S. dollar–Polish zloty exchange rates are as follows: Date Spot Rate Forward Rate (to January 31, 2021) October 1, 2020 $ 0.26 $ 0.30 December 31, 2020 0.29 0.33 January 31, 2021 0.31 N/A Mertag designates the forward contract as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the forward rate, and, therefore, forward points are included in assessing hedge effectiveness. Mertag must close its books and prepare financial statements on December 31. Discounting to present value can be ignored. Determine the net benefit, if any, realized by Mertag from entering into the forward contract.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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On October 1, 2020, Mertag Company (a U.S.-based company) receives an order from a customer in Poland to deliver goods on January 31, 2021, for a price of 1,030,000 Polish zlotys (PLN). Mertag enters into a forward contract on October 1, 2020, to sell PLN 1,030,000 in four months (on January 31, 2021). U.S. dollar–Polish zloty exchange rates are as follows:
| Date | Spot Rate | Forward Rate (to January 31, 2021) |
||||
| October 1, 2020 | $ | 0.26 | $ | 0.30 | ||
| December 31, 2020 | 0.29 | 0.33 | ||||
| January 31, 2021 | 0.31 | N/A | ||||
Mertag designates the forward contract as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the forward rate, and, therefore, forward points are included in assessing hedge effectiveness. Mertag must close its books and prepare financial statements on December 31. Discounting to present value can be ignored.
- Determine the net benefit, if any, realized by Mertag from entering into the forward contract.
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Determine the net benefit, if any, realized by Mertag from entering into the forward contract. (Do not round intermediate
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