Answer: $3,000
Explanation: The US-based company should report a foreign currency exchange loss of $3,000 on its income statement for the year ended December 31, 2018.
Here's how to calculate it:
- The company entered into a 90-day futures contract to purchase 90,000 Swiss Francs on November 2, 2018, when the contract quote was $1.10.
- The company was speculating on the price movement of the Swiss Franc.
- There were three exchange rates that existed during the contract:
- 30-day future spot rate on November 2, 2018, was $0.041
- 60-day future spot rate on December 2, 2018, was $0.051
- 90-day future spot rate on January 31, 2019, was $0.071
- The company's contract expired on January 31, 2019, which means that it had to purchase the Swiss Francs at the prevailing spot rate on that day.
- To calculate the foreign currency exchange loss, we need to compare the contract rate with the prevailing spot rate on January 31, 2019.
- The contract rate was $1.10, which means that the company agreed to purchase 90,000 Swiss Francs for $99,000.
- The prevailing spot rate on January 31, 2019, was $0.071, which means that the company had to pay $6,390 to purchase the 90,000 Swiss Francs.
- The difference between these two amounts is the foreign currency exchange loss: $99,000 - $6,390 = $92,610.
- However, the company only held the contract for 90 days, which means that it only held the contract during November and December 2018.
- To calculate the foreign currency exchange loss for the year ended December 31, 2018, we need to calculate the difference between the contract rate and the spot rate on December 2, 2018, which is $1.10 - $0.051 = $1.049.
- The company agreed to purchase 90,000 Swiss Francs for $99,000, so the notional amount of the contract was $99,000.
- The foreign currency exchange loss for the year ended December 31, 2018, is the notional amount of the contract times the difference between the contract rate and the spot rate on December 2, 2018