A company enters into a forward exchange contract to hedge its US dollar payable which is due in 90 days.The company committed to purchase sufficient US currency to settle its liability at a rate of $1 US=$1.20 CAD US.The company's year-end falls 30 days before the settlement date.On that date, the forward rate for 30-day settlement contracts was 1 US=$1.22 CAD US.As a result of these facts the company will record a gain on its current year financial statements.

Question

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The company will record a loss on its current year financial statements because the forward rate moved from $1.20 CAD to $1.22 CAD per US dollar, making it more expensive to purchase US dollars at year-end than when the contract was entered into.

A Company Enters into a Forward Exchange Contract to Hedge