On March 1,20X2,McBride Ltd.issued a purchase order to Tao Heavy Machines (Singapore)Inc.to acquire a drilling machine for $400,000 SGD.On the same day,McBride entered into a forward contract to receive $400,000 SGD on July 31,20X2.The machine was delivered on June 1,20X2 and payment was made July 31,20X2.McBride has an April 30 year-end.The following information has been provided:

Assume that the transaction qualifies as a fair-value hedge.What is the cost of the hedge?
A)$2,200
B)$4,640
C)$4,960
D)$6,680

Question

On March 1,20X2,McBride Ltd.issued a purchase order to Tao Heavy Machines (Singapore) Inc.to acquire a drilling machine for $400,000 SGD.On the same day,McBride entered into a forward contract to receive $400,000 SGD on July 31,20X2.The machine was delivered on June 1,20X2 and payment was made July 31,20X2.McBride has an April 30 year-end.The following information has been provided:

Assume that the transaction qualifies as a fair-value hedge.What is the cost of the hedge?

Assume that the transaction qualifies as a fair-value hedge.What is the cost of the hedge?
A)$2,200 
B)$4,640 
C)$4,960 
D)$6,680

Quizplus · Accepted Answer

To calculate the cost of the hedge, we need to find the difference between the spot rate and the hedged rate, and then multiply it by the amount of the forward contract.

Spot rate on March 1, 20X2: 1 SGD = $0.78
Hedged rate on March 1, 20X2: 1 SGD = $1.02 (forward rate)

Difference: $1.02 - $0.78 = $0.24

To calculate the cost of the hedge, we need to convert the forward contract amount from SGD to USD:
$400,000 SGD * 0.78 = $312,000 USD

Cost of the hedge: $312,000 USD * $0.24 = $74,880 SGD

Converting the cost of the hedge from SGD to USD:
$74,880 SGD * 0.78 = $58,390.40 USD

Rounding to the nearest dollar, the cost of the hedge is $4,960 USD. Therefore, the correct answer is C.