RXN's Year-End Is on December 31 *For Contracts Expiring on March 1, 2020
What Is the When

question 4

Multiple Choice

RXN's year-end is on December 31. On November 1, 2019 when the U.S. dollar was worth CDN$1.365, RXN sold merchandise to an American client for US$300,000. Full payment of this invoice was expected by March 1, 2020. On December 1, the spot rate was CDN$1.3450, and the three-month forward rate was CDN$1.3250. In order to minimize its Foreign Exchange risk and exposure, RXN entered into a forward contract with its bank on December 1, 2019 to deliver US$300,000 in three months' time. The spot rate at year-end was CDN$1.36 and the forward rate from December 31, 2019 to March 1, 2020 was CDN$1.34. On March 1, 2020, RXN received the US$300,000 from its client and settled its contract with the bank. The forward contract was to be accounted for as a fair value hedge of the US dollar receivable.
Significant dates and exchange rates pertaining to this transaction are as follows:
$\begin{array}{|l|r|r|}\hline&Spot~ Rates &Forward ~Rates\\\hline \text { November 1, } 2019 \text { (Transaction date) } &\mathrm{US} \$ 1=\mathrm{CDN} \$ 1.365\\\hline \text { December } 1,2019 \text { (Hedged date) } & \text { US } \$ 1=\text { CDN } \$ 1.3450 & \text { US\$1=CDN\$1.3250 } \\\hline \text { December 31,2019 (Year-end) } & \text { CDN } \$ 1.36 & \text { CDN } \$ 1.34 \\\hline \text { March 1, 2020 (Settlement date) } & \mathrm{US} \$ 1=\text { CDN } \$ 1.368 & \text { US\$1 =CDN\$1.368. }\\\hline\end{array}$ *for contracts expiring on March 1, 2020
What is the amount of the discount on the forward contract?

• A) CDN$1,000
• B) CDN$1,500
• C) CDN$3,000
• D) CDN$6,000

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Definitions:

Japanese Automakers

Automotive manufacturers based in Japan, known for their innovation, efficiency, and reliability in the global car market.

Spot Trade

A transaction that involves the immediate exchange of one commodity or currency for another at the current market price.

Export Development Canada

A Canadian government agency that provides insurance and financial services, among others, to help Canadian exporters and investors expand their international business.

EDC

Often refers to Economic Development Corporations, which are organizations focused on promoting economic growth within a specific geographic area.