Use the Following Information to Answer the Question(s)below

question 21

Multiple Choice

Use the following information to answer the question(s) below.
On December 1,2014,Thomas Company,a U.S.corporation,purchases inventory from a vendor in Italy for 400,000 euros.Payment is due in 90 days.To hedge the transaction,Thomas signs a forward contract to buy 400,000 euros in 90 days at $1.3670.Thomas uses a discount rate of 6% (present value factor for 30 days = .9950;60 days = .9901;90 days = .9851) .Assume the forward contract will be settled net and this is a cash flow hedge.Currency exchange rates are shown below:

-What is the fair value of the forward contract at February 29?

• A)$-0-
• B)$1,654.97 asset
• C)$1,654.97 liability
• D)$1,680 asset

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Definitions:

Useful Life

The estimated period over which a fixed asset is expected to be usable by an organization.

Discount Rate

The interest rate used to discount future cash flows to their present value, often used in investment valuation and project evaluation.

Annual Net Cash Inflows

The total amount of cash received minus cash expenses over a year.

Net Present Value

The discrepancy in the present valuation of incoming and outgoing cash flows within a certain timeframe.