Question

Simpson Sign Company based in Frostbite​ Falls, Minnesota has a 6minusmonth ​C$100,000 contract to complete sign work in​ Winnipeg, Manitoba, Canada. The current spot rate is​ $1.02/C$ and the forward rate is​ $1.01/C$. Under conditions of​ equilibrium, management would use​ ________ today when preparing operating budgets

Answer 1

Answer:

$101,000

Explanation:

Given

Current Spot Rate = $1.02/C$

Forward rate = $1.01/C$

Duration = 6 months

Cost of Contract = $100,000

When preparing operational budget, the management would use the following;

Forward Rate * Cost of contract

Where Forward rate = $1.01/C$ and Cost of Contract = $100,000.

So, Usable Budget = $1.01 * $100,000

Usable Budget = $101,000.

Hence, Under conditions of​ equilibrium, management would use​ $101,000 today when preparing operating budgets

Answer 2

Answer:

$1.01/C$, which represent $101,000 (US)

Explanation:

The spot rate represents how much 1 Canadian dollar is worth today, and that would be $1.02 US. Since the contract is to be completed in 6 months, then the Simpson Sing Company must use the future exchange rate which is the forward rate. The forward rate for 6 months is 1.01 US dollar per Canadian dollar. That means that the US dollar will appreciate v. the Canadian dollar.

Since the forward rate = $1.01/C$, the total value of the contract is $101,000 US.