Accounting

Psychological health
October 29, 2020
Pros and/or cons associated with acquisition.
October 29, 2020

On November 1, 2001 Zamfir Company, a U.S. corporation, purchased minerals from a Russian company for 2,000,000 rubles, payable in 3 months. The relevant exchange rates between the U.S. and Russian currencies are given:

 

 

 

Spot rate

Forward rate (at February 1, 20×2)

November 1, 20×1

$0.348

$0.348

December 31, 20×1

0.359

$0.352

February 1, 20×2

0.344

 

 

The company’s incremental borrowing rate provides a discount rate of 0.975 for three months.

 

REQUIRED:

 

(a) If Zamfir does not attempt to hedge this transaction, discuss on the gain or loss that should be shown on the company’s December 31, 2001 financial statements.

 

(b) Assume that on November 1, 2001 Zamfir Company enters a forward contract to buy 2,000,000 rubles on February 1, 2002. Discuss the fair value of the forward contract on December 31, 2001?

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