Assuming a forward contract was entered into on December 16, at what amount should the forward contract be recorded at December 31, 2018? Assume an annual interest rate of 12% and a fair value hedge.The present value for one month at 12% is .9901.
A) $ 200.
B) $ 295.
C) $ 495.
D) $ 500.
E) $ 9,300.

Question

Quizplus · Accepted Answer

To calculate the amount at which the forward contract should be recorded, we need to determine the fair value of the contract at December 31, 2018.

Assuming that the forward contract is a fair value hedge, any changes in the fair value of the contract are offset by changes in the fair value of the underlying asset being hedged. Therefore, the fair value of the contract at December 31, 2018 would be determined by discounting the difference between the spot price of the underlying asset and the forward price of the contract to the present value using an appropriate discount rate.

Since the contract was entered into on December 16, 2018, there are only 15 days remaining until the contract's maturity date. Therefore, the difference between the spot price and the forward price of the contract would be discounted by the present value factor for one month at an annual interest rate of 12%, which is .9901.

Assuming that the difference between the spot price and the forward price is $500, the fair value of the contract at December 31, 2018 would be:

Fair value of contract = ($500 x .9901) = $495

Therefore, the forward contract should be recorded at $495 at December 31, 2018. The correct answer is C.

Assuming a Forward Contract Was Entered into on December 16