On August 1st of the current year, Lenz Company writes a contract agreeing to sell to Hindman Company 15,000 British pounds at a specific price of $0.69 per pound with delivery in 60 days.Throughout the 60-day period the forward rate varies as follows: ?

$\begin{array}{ll}
60 \text { days remaining on the contract } & \$ 0.69 \
30 \text { days remaining on the contract } & \$ 0.68 \
0 \text { days remaining on the contract } & \$ 0.675
\end{array}$
Assume an 8% discount rate for Lenz Company and Hindman Company.For the first 30 day period, Lenz Company would recognize a:
A)$149 loss.
B)$149 gain.
C)$150 loss.
D)$150 gain.

Question

On August 1st of the current year, Lenz Company writes a contract agreeing to sell to Hindman Company 15,000 British pounds at a specific price of $0.69 per pound with delivery in 60 days.Throughout the 60-day period the forward rate varies as follows: ?

$\begin{array}{ll}
60 \text { days remaining on the contract } & \$ 0.69 \
30 \text { days remaining on the contract } & \$ 0.68 \
0 \text { days remaining on the contract } & \$ 0.675
\end{array}$
 Assume an 8% discount rate for Lenz Company and Hindman Company.For the first 30 day period, Lenz Company would recognize a:
A)$149 loss.
B)$149 gain.
C)$150 loss.
D)$150 gain.

Quizplus · Accepted Answer

For the first 30 days, the forward rate decreases from $0.69 to $0.68. This means Lenz Company would recognize a gain because it had locked in a higher price ($0.69) than the market rate after 30 days ($0.68). The gain is calculated based on the difference in the rates ($0.69 - $0.68 = $0.01) multiplied by the amount of British pounds (15,000), which equals $150. However, considering the time value of money over 30 days at an 8% annual rate, the present value of this gain is slightly less than $150, hence a $149 gain is recognized.

On August 1st of the Current Year, Lenz Company Writes