Disadvantages of using forward contracts

Reference no: EM13767348

Draft a memo to a client comparing the advantages and disadvantages of using forward contracts and options to hedge foreign exchange risk.

On December 1, 2009, a U.S.-based company entered into a three-month forward contract to purchase 1 million Mexican pesos on March 1, 2010.

The following are the purchase rates for US dollar per peso

Date

Spot Rate

Forward Rate (March, 2010)

December 1, 2009

$0.088

$0.084

December 31, 2009

$0.080

$0.074

March 1, 2010

$0.076

The company's borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803.

How will the U.S. company report the forward contract on its December 31, 2009, balance sheet?

Reference no: EM13767348

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