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

question 27

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 March 1?

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

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Definitions:

TC Curve

A graphical representation showing the total cost of producing different quantities of a good or service.

TVC Curve

A graphical representation showing the relationship between a firm's total variable costs and its output level.

TFC

stands for Total Fixed Costs, which are the costs that do not vary with the level of production or sales, such as rent or salaries.

Average Fixed Cost

The fixed costs of production divided by the quantity of output produced, showing the cost of each unit's share of the fixed expenses.